It ought to be the ideal home buyer’s market: mortgage rates are sitting at three-decade lows and residential real estate sales have slowed, meaning sellers are probably more willing to bargain.

There’s just one snag: Lenders are still licking their wounded balance sheets thanks to the subprime mortgage implosion of 2008 and high foreclosures are a continuing problem.  As a result, mortgage issuers have become a whole lot pickier about who they loan money to. 

If you’re in the market for a loan these days, your “FICO” score needs to be as high as possible. 

While having a perfect “850” is unrealistic, credit experts recommend aiming for at least 700 and preferably above 719.  (If you have a pulse, the lowest score you can possibly have is 300.)

Until about 10 years ago the formula that determines your credit score was a black-box secret developed by the folks at Fair Isaac Corporation (www.fico.com). 

Then they decided to reveal the five components that make up your three-digit credit rating:

35%- payment history

30%- amounts owed compared to available credit

15%- length of your credit history

10%- new credit accounts you’ve recently opened

15%- the “mix” (types) of different credit you’ve used (e.g. mortgages, car loans, revolving credit, etc.)

In other words, two-thirds of your credit score comes from whether you pay your bills on time and how much of your available credit you’re actually using. It stands to reason then, that if you can get a handle on these two factors, you can significantly improve your score and maybe qualify for that mortgage or car loan you want.

“Consumers are starting to understand how making payments affects their credit score. They’re starting to prioritize their bills based on when payments come in.” says Steve Kramer, of Western Union.

That’s right, Western Union.

Despite what you might have thought, the company did not disappear along with telegrams and Pony Express mail delivery.  In fact, it has morphed into a major player in the bill-paying business.  Not only can you walk into a Western Union office and pay your mortgage, utility and other bills in person--the company is often behind the software that enables you to make payments online.

Gone are the days of trying to figure out when it was safe to drop your mortgage payment in the mail so it wouldn’t arrive before your paycheck cleared.

Juggling various bills and timing when to mail your checks are so yesterday.

In many cases, it’s now possible to submit your payment from your phone or via the Internet the day your paycheck or Social Security check electronically hits your bank account.  And you can receive credit that same day, as well, allowing you to pay your bill on the very last day possible. 

According to Kramer, some creditors have started sending alerts to consumers’ cell phones reminding them of upcoming bills.

He says members of “Generation Y” are expecting this level of service, “they’ll even pay via cell phone. To Gen Y, e-mail is considered a slow technology.”

According to Western Union, if you take the following steps you are “guaranteed” to see your credit score improve over the next 12 months:

1. Think before you buy. If purchasing something on credit will take you two years to pay off, “it’s not worth it.”

2. Don’t max out your credit cards. This goes back to the “30%” of your credit score that depends on the ratio between credit used/credit available. The smaller the percentage, the better your score.

3. Pay your bills on time. According to FICO, if your credit rating is an excellent 780 and you are 30 days late in making a payment, it can shave as much as 110 points off your score. If the same mistake were made by someone with a credit score of 680, it would only knock 60 to 80 points off.

4. Do not apply for new credit cards. Every time you do the issuer runs a credit check.  Each inquiry shaves points off your score.

5. Don’t forget about old credit cards and use every card at least once a year.  Pay the amount you charge in full (and on time) or the issuer might close your account due to inactivity.  That would hurt your credit used/credit available ratio.  (See No. 2)

6. Check your credit report at least once a year to make sure the information is up-to-date and accurate.  Unfortunately, a Western Union survey conducted earlier this year found that 1 in 4 consumers have never checked their credit score.

Under federal law, you are entitled to one free report every 12 months from each of the three credit-reporting agencies. Don’t get sucked in by many for-profit web sites that want to charge you for monitoring and other services.

 Instead, every four months, check your credit score at a different credit agency. If something negative hits your account, you’ll find out about it because it will likely be picked up by all three.

According to the Federal Trade Commission, “There is only one authorized source for a truly free credit report:” www.AnnualCreditReport.com.

7. Knowledge is power.  Understand what factors make up your credit score and how your behavior impacts it. The two most important things you can do are

  1. pay on time,
  2. avoid maxing out your accounts and show a pattern of reducing the balances outstanding.