Tips for Avoiding Common Credit Score Pitfalls

When you are buying or refinancing a home, your credit score will be among the factors that influence how large of a mortgage you qualify for, and how low your rate and fees will be. The higher your credit score, the lower your rate and payment is likely to be.

Home buyers and homeowners refinancing can make some positive adjustments to their scores before financing. But there are also some pitfalls that can bring your score down that you need to avoid. The tips below will help you do so.

1. Try not to open new credit accounts for 4 months and up to 1 year before you buy or refinance. While new credit accounts, can increase your credit diversification and improve your score in the long run it will certainly lower your score in the short term before you prove your spending habits for the new credit. Seasoning new accounts for several months and up to a year may be necessary to improve your score. If you have fewer open credit accounts, each new account will have a more dramatic change to your score.  Opening more than one account per year will also create a bigger initial decrease in your score. Lenders may misread your behavior, assuming that you are desperately opening new credit lines because you need the cash, and not because you are trying to improve your score.
2. Check your credit score and credit reports. One of the worst mistakes you can make is walking into the home purchase process totally blind about your credit. Be sure to look up, track your credit score, and order one of your free credit reports before you embark on the process. Get a feel for what your score is, and what factors are influencing it. Action item: Check your credit reports from all three bureaus for free at AnnualCreditReport.com. For scores, consider using a free service like the ones offered by your bank, credit card, or Credit Karma, but understand it’s an estimate.
3. Be mindful of your timing if you contest items. Some home buyers and homeowners contest certain items on their reports, asking them to be removed so their scores will increase. If you do this early enough, it may be okay, as you could get the items removed and bump up your score. Be wary about doing it right before or during the application process even if the credit is bad. Sometimes it just complicates the process and slows it down.  It might even drop your score in the short term.
4. Wait until after your new home purchase or refinance closes before you apply for or use credit for major expenses.  Your mortgage lender will probably re-pull your credit a second time right before your loan closes.  If your score has changed or large purchases have been made it may affect your interest rate or your ability to qualify. As you anticipate moving into a new home, you may start thinking about all the furniture and décor you want to buy. Furniture is expensive, and you might need credit to purchase it. Try to avoid doing this, as you will increase your credit utilization, which can cause your credit score to drop. Instead, hold off on using credit to make expensive purchases until you are done buying your home. That is typically a better move financially anyway, as it helps you stave off the urge to make impulse buys you may regret later.

Buy a Home or Refinance in Washington State or Colorado

Blue Square Mortgage can give you personalized advice regarding your credit as we walk you through the mortgage application process. To apply for a home loan now, please give us a call at (206) 352-6453. We can help you buy a home anywhere in WA or CO.