An important factor to be considered when you are looking to buy a real estate property is your credit score. Applying for a credit such as credit card, personal loan, car loan, and home loan necessitates your lender to check if you are a good credit risk—you are likely to able to pay your loan on time.

Credit reporting agencies: Equifax, Experian, and TransUnion maintain records of credit use and other information relevant to it. Lenders check these records whenever you apply for a loan.

Well, the process is a lot trickier than one might think. So, let’s go ahead and look into the whats, whys, and hows of a credit score, shall we?

What is a Credit Score?

A credit score is an important tool for lenders to evaluate your credit record and determine the level of your credit risk. This number represents a summary of your behavior as far as loans, credit cards, and other financial products; the higher your credit score is, the better. In other words, it a way of measuring how good and responsible you are as a borrower. Needless to say, you need to show and maintain a good credit score when you are applying for a home loan.

The most commonly used credit scores used by lenders is FICO scores by Fair Isaac Corporation. The following factors are considered when calculating your credit score: payment history, amounts you owed, length of credit history, new credit accounts, and types of credit used.

The minimum credit score may vary depending on the type of loan you are applying.

  • FHA Loan – 580 and a 3-5% down payment. Lower credit score may be allowed but with a 10% down payment.
  • VA or Veterans Affairs Loan – no minimum credit score required. However, VA does not act as a lender but guarantees the loan. Thus, the credit score requirement will depend on the VA lender which typically require a minimum credit score of 620 or higher.
  • Conventional Loan –  credit score of 620-640. However, a credit score of 660 or higher will give you better chances of getting qualified.

Now, for the tricky part.

How Do You Maintain a Good Credit Score?

What does a good credit score mean to you in the first place? A good credit score means a good chance that you will get your loan application approved and just as important, lower interest rate.

The following should help you keep your credit score looking spotless or improve it, if needed.

  • Make sure your credit report is error-free – Paying your bills on time does not guarantee that your credit score will not be tarnished. Request a copy of your credit report, check it thoroughly, and immediately report to the credit bureau any error that you have spotted.
  • Don’t close old, paid off accounts –  Closing your old, paid-off accounts will make your average credit age shorter and lower your credit score.
  • Manage your debt – Ideally, you should keep your credit balance 30% of your credit limit.
  • Pay bills on time – If possible, pay your bills on time. Paying just the minimum would result in exorbitant fees. However, if you are left out with no choice, pay the minimum at least for that month. Make sure you don’t miss any payment.
  • Consolidate your cards – having multiple cards with balances can lower your credit score. Consider consolidating your cards and manage your monthly payments onto one card alone.
  • Don’t apply for a new credit card – New credit card application can cause your credit score to drop to as much as 70 points.  Applying for a new credit card will require an inquiry on your credit report. The number of inquiries on your credit report within the past 12 months accounts for 10% of your credit score.

Final Thoughts

Your credit score tells your lender how responsible you are as a borrower. While it requires hard work on your part to maintain a good credit record, you will stand to benefit so much more in terms of saving on interest payments and owning your dream home.