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I am considering shopping for a house somewhere this year, which of course would involve shopping for a mortgage. And mortgage rates depend on the credit score. My credit history is clean from trouble, but short - which puts my score in the "OK, but not great" range (different agencies give varying numbers, from 711 on Experian to 800 of VantageScore). I can not change the length of the history, but I probably could lower the utilization somewhat, avoid getting new credit (I periodically sign up for some credit cards to get bonuses, etc. - I could stop doing that), wait until old credit inquires expire, etc. The question is - is it worth it? I'm sure mortgage rates do not depend on each point of the score - that would be too complicated to handle, there must be some thresholds. So would it be worth for me to gain some points on the score - I tried various simulators and got very different results, from basically nothing to 20-30 points - or it would not be worth the effort in short term?

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The score you should be concerned with is the FICO score, generally the best mortgage rates require a 720 FICO (I have heard of some wanting as high as a 740 FICO). If you're middle score is greater than 740 I wouldn't worry to much about trying to improve yours scores.

If not there are some easy things you can do to increase your score besides the obvious of paying your bills on time.

Reduce your the percent of credit you are using on revolving accounts (both total and on individual lines). As far as FICO scores are concerned owing $500 on a credit card with a $500 limit is much worse than owing $5000 on a card with a $20000 limit. You want to reduce the overall percent of credit you are using as well as the percent of each credit line that you are using, ideally you want to stay under ~20% anything over 50% is going to have a real negative impact on your score. If you pay your cards off in full every month you can either not use them the 2 months before you apply for a mortgage or simply pay them off before the statement date (not the due date), because most credit card companies report the amount due on the statement if the amount due is 0 or very low then it will look like you have little/no utilization on that account.

Another thing to consider with utilization is that credit cards with "no preset spending limit" are generally bad for your score because they report your highest balance as your credit limit meaning you will generally show very high utilization on these cards even if you don't charge much on them.

Utilization on installment accounts won't count against your credit utilization but the monthly payments do count against your debt to income ratio for the loan.

Of course you probably also want to minimize the number of credit inquiries in the 12 months before you apply for the mortgage. A couple isn't going to hurt anything but if you have a whole bunch it may cause issues even though the effect on your FICO is pretty minimal. New credit inquiries also leads to new accounts which will lower your average age of accounts, but also lower your average utilization (practically a wash imo).

It is important to note the only score that really matters is the FICO score the rest are rarely used by banks and as such are essentially worthless and have little to no relation to your actual FICO score.

I should also mention that most of the numbers in this post are informed speculation the FICO scoring formula is a secret so exact thresholds are impossible to come by.

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If your FICO score is > 700 you're ok. AFAIK, you need a 10-12 year history to maximize a FICO score. Note that most/all of the guidance online is based on FICO, and other scoring systems may vary.

Paying off debt is always a good idea, so long as you don't impair your ability to make a down payment. Also traditionally, lenders don't like your housing debt payment to income ratio being above 28% (including property tax and insurance) and your back-end ratio being over 36%.

  • It's not a permanent debt, it's recurring debt - i.e. I could pay some things with check instead of credit card and thus lower my CC utilization, or use debit card instead of credit card for shopping, etc. It won't change my cash flow but would influence which part of it is seen by the credit agency. – StasM Jan 3 '11 at 23:01
  • that should be no problem, unless you're running up to the credit limits. – duffbeer703 Jan 5 '11 at 1:59

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