Your Credit Score - In a Nutshell

Lesson Summary: A good credit score will help you get approved for a mortgage loan. In this lesson, you'll learn about the connection between credit and mortgages, and also how to maintain a good credit score.

• Your credit scores are based on information found within your credit reports. These reports are basically a record of how you have borrowed and repaid money over the years.
• You have three reports and three corresponding scores, because there are three companies that collect this kind of data (Experian, Equifax and TransUnion).
• There are different kinds of credit scores, but as a home buyer you only need to be concerned with one -- your FICO credit score. This is the one used by mortgage lenders.
• FICO scores range from 300 - 850. The higher the number, the better. The average FICO score in the U.S. is around 680.
• When you apply for a home mortgage loan, the lender will review all aspects of your financial history. They'll look at your income, your debts, and your current credit score.
• If your credit score is too low (based on a particular lender's underwriting guidelines), you might not get approved for the loan. If you do get approved with a less-than-ideal score, you'll end up paying a higher interest rate than a borrower with good credit.
• So there are really two benefits to having a good credit score. It helps you get approved for a mortgage loan, and it also helps you qualify for a lower interest rate on the loan.
• Unfortunately, you have to purchase your credit score. Federal law entitles you to free credit reports each year, but this law does not apply to credit scores. You can expect to pay around $15 for each of your scores (through Experian, Equifax and TransUnion).
• If your score is below average, the lender may consider you a "subprime" borrower. They might reject your application because of this, or they might approve you with a high interest rate.
• You can improve your score by paying all of your bills on time, reducing your credit card balances, and correcting any errors you find in your credit reports.
• Nobody can improve your score but you, so be wary of any company that makes promises to "repair" your credit for you. Nearly all of these companies are scams.