No doubt your credit score is one of the most important numbers in your financial life -- and perhaps in your personal life as well.In fact, research has shown that if a couple's credit score differs by less than 66 points, they're less likely to eventually split up.
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Clearly, credit scores can predict certain outcomes, and this is why mortgage lenders put your credit score under the microscope during the process of getting a mortgage.
In the video segment below, Motley Fool analysts Nathan Hamilton and Kristine Harjes talk more about several credit score mistakes that could tank your chance of securing mortgage savings.
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Kristine Harjes: It is well known that credit scores are one of the major factors that determine your mortgage rate, so we really want to get together here and give our listeners some good tips that they can use to make sure that they get the best mortgage rate. In particular, we want to go over three crucial mistakes to avoid.
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Nathan Hamilton: Yeah. Because with mortgages, and we'll get into those, but essentially your FICO score can mean, for some large home purchases, a difference between a couple of hundred thousand dollars over a 30 year fixed mortgage. It definitely is important to pay attention if you compare a high score versus a low score.
Running through some possible mistakes that people could run into. First off, missing a payment. Why this is important is 35% of your FICO score depends upon your payment history. If you are looking to get a mortgage and, say, the month before you apply, you miss a payment. This is going to have the biggest impact out there of any mistake you can make. It's definitely important to pay attention to.
Harjes: Right. Make sure that you're keeping track of when your different bills are due. Set up alarms, reminders-
Hamilton: Auto pay.
Harjes: Alerts. Auto pay is extremely helpful.
Hamilton: Yep. That's what I use.
Harjes: There are plenty of ways that you can do this.
Hamilton: Yeah. Absolutely. Don't miss a payment. That's just a general rule for mortgages and for life.
Harjes: Yeah. For life. Exactly. That's number one. Number two is don't run up your balances. This is very important as well because it's actually 30% of your FICO.
Hamilton: Yeah. That's more specifically looking at what's called credit utilization. It's just taking your total credit available versus what you're actually borrowing. As your utilization ratio increases, your credit score tends to decrease. Just before you're applying for a mortgage, if you're running up your balances, say, you're buying your TV, put a down payment on something, whatever large purchase, it's going to impact your credit score. If you look at FICO scoring models, you've got payment history at 35%, the biggest single factor. The next one is credit utilization at 30%. Generally, to get the best credit scores, you'll want to keep your utilization below 10%, which means if you have a 100,000 credit, borrow less than 10,000.
Harjes: Another way that you can approach that issue is to get your credit line extended from the different lines that you have. All right. What is the third and final mistake that people should avoid?
Hamilton: This is an update to the FICO scoring models over time, but it's a smart move to shop mortgage lenders to find the best rate to have them negotiate, pit each other against each other to essentially decrease the number of fees, to possibly decrease the rate as well. But you want to be very specific when you're shopping mortgage rates because if you do so in a finite period of time, a short period of time, it's going to count as one credit inquiry. But if you make the mistake and, say, you shop one mortgage rate lender in March, then you wait until April for another one, and then later on throughout the month ... Or throughout the months, you're going to have multiple inquiries on your credit report, which will ding your credit score as well.
Harjes: The bottom line is that you do have a window of time but you need to stick within it.
Hamilton: Yeah. Stick within it and that'll be treated as one rate inquiry and there is a small, small ding to your credit score when you have inquiries.
Harjes: For more great tips like these, head to fool.com/mortgages, where you can get started finding a low rate and you can also get access to highly rated lenders, as well as our free guide, Five Tips to Increase Your Credit Score Over 800.
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