How Your Credit Score Affects Your Borrowing Power

Equifax, Trans-Union and Experian are the three credit bureaus that score your credit rating. They each monitor your payment history, outstanding debt, duration of your credit history, types of credit used and new credit accounts.

Your combined credit score is one of the most important factors in determining whether a lender will provide you with a mortgage loan because it helps the lender determine your default risk. The size of your down payment and your debt-to-income ratio also are primary factors that lenders take into serious consideration.

Credit scores tend to range between 500 and 800. The lower the credit score, the more likely a borrower will default on a loan. If you’re at the lower end of this spectrum, you may need to clean up your credit in order to qualify for a home loan, or you may have to shop some of the more costly programs that factor your increased default risk. Conversely, a favorable credit score may provide you with access to lower mortgage interest rates and a generous array of loan options and terms.

It’s imperative that you get copies of your credit reports from all three credit bureaus as soon as possible because the reports can contain errors that may take months to resolve. There are plenty of online resources – including some of the major credit bureau Web sites – that for a fee will provide a combined credit report.

You can get your credit report in shape by taking a number of precautions: fix errors, avoid opening new accounts or making any large purchases, e.g., a new car, and keep existing credit-card balances low. Moving debt around from one credit card to another doesn’t fool anybody and it can adversely affect your credit score if some of the credit cards are then maxed out.