Ever since subprime mortgages became more "sub" than "prime," lenders have been tightening up. Now homebuyers must show that they’re creditworthy, which is measured by a credit score.
You may need a score over 680 to get a competitive rate on a home mortgage now. A few years ago, you could get a loan at a good rate with a 650 score, so lenders are raising their standards.
Credit scores also are weighed when you want to buy something on time. Some auto and home insurance companies may judge you by your credit score, too. Here’s how your credit score is determined:
* Payment history: 35 percent. The best way to raise your score is to pay all your bills on time. Pay the minimum due if that’s all you can manage. Each late payment has a negative impact on your credit score. A 60-day late payment is worse than a 30-day lateness, and 90 days are even worse. Negative reports stay on your credit report for seven years, but the impact on your score won’t be as severe after four or five years.
* Amounts owed: 30 percent. Once your balance on a credit card goes over 35 percent of the available line, your score may drop. Therefore, you should spread your credit card usage around. If you’re charging $8,000 this month, it’s better to put $4,000 on each of two cards than $8,000 on one card.
* Length of credit history: 15 percent. Closing an old credit card might hurt your score if you remove favorable long-term records from your credit history. Thus, instead of closing a little-used card, keep it in effect. Use it regularly for small items, then pay the bills on time.
* New credit: 10 percent. Multiple credit requests and multiple new accounts are negatives. Sometimes, shoppers are told they can get, say, 15 percent off on all purchases that day by getting a store card. That opens a new line of credit. If you do this at several stores within a few weeks, you can lower your score. Also, you should avoid increasing your credit card use while you’re in the market for a home loan or a refinance of an existing mortgage.
* Types of credit in use: 10 percent. It’s good to have both revolving (credit cards) and installment debt (such as a car loan) on your credit history. On the other hand, having too many accounts may hurt your score so don’t try to fill your wallet with cards.
