Most home-buying guides agree: the first thing you should do when you’re thinking about buying a house is check your credit. For a few years during the housing boom, you could get around bad credit by taking out a subprime mortgage loan – but you only need to look at the foreclosure rate to see why it’s a bad idea to try to buy a house without getting your financial situation together first.
Your credit score rates how trustworthy you are, based on your financial history. Bad credit scores are strongly correlated to late payments and loan defaults, while good scores tell a lender that you’re probably the type of person who can be trusted to handle money, so your score is an easy way for banks to answer the pressing question of how likely you are to pay back any money they loan to you.
Several services create credit scores, but the most popular credit score system is the FICO. The FICO score ranges from 300 (very, very bad credit) to 850 (very, very good credit). The 3-digit number attached to your name can shape your future by determining how much money you’ll pay in interest. The lower your score, the more it’ll cost you to borrow money – if you can find anyone to lend it to you in the first place.
If your credit score is under 600, you’ll have a hard time borrowing money, especially for a mortgage in the current economy. You’re a subprime sort of customer and skittish banks may not want to deal with you – or if they do deal with you, you’ll only be able to borrow at the highest rates of interest. Over the life of a 30-year mortgage, that means someone with poor credit will up paying tens of thousands of dollars more than someone with good credit. The best interest rates are usually reserved for customers with a score of 720 or better, while customers who fall between 600 and 720 are middle-of-the-road.
A couple years ago congress passed legislation that requires the three big credit bureaus, Experian, Trans-Union and Equifax, to give each consumer one free credit report every 12 months. You can opt to purchase your credit score along with the free copy of your report – after all, what’s a free service if it doesn’t have an upgrade option? You can visit http://www.annualcreditreport.com to get one free report form each of the three big credit bureaus every 12 months. Be sure to check all three versions of your credit report – they could be different.
