Choosing a lender isn’t the first step in becoming a homeowner. In reality, the home buying process begins with your finances. Without an above average credit score, buying a house is harder and you could find yourself renting longer than you expected in the Sacramento area until your score improves.

The Fair Isaac Company calculates your FICO score on the summary of your total credit history. The score ranges from 300 to 850, with most people traditionally having a score of 600. In recent years, however, some people have seen their score drop by hundreds of points because of unemployment, delinquent credit card accounts, or credit card accounts terminated because the card didn’t carry a high balance. Some of the pieces in reviewing your FICO score include:

  • Types of Credit — Do you have a healthy mix of loans and credit cards?
  • Payment History — Do you pay your bills on time every month?
  • Credit to Debt Ratio — How much do you owe versus how much credit you have available?
  • Credit Inquiries — Do you have too many open accounts?

When you pull your credit report, you’ll find that you actually have three reports. Experian, Equifax, and TransUnion — three of the major credit reporting agencies — use a slightly different system to calculate your credit rating. FICO is used by Experian, Equifax’s model is called BEACON, and TransUnion uses EMPIRICA. This means you have three scores . . . one for each bureau.

When you apply for a mortgage or any other loan, lenders want to make sure that extending a loan to you isn’t a problem. Your credit score gives lenders insight into what type of borrower you’d be based solely on your credit history. Because of the shift in the economy, most home buyers should have scores in the range of 740 or higher to get a satisfactory interest rate. If your score is less than that, you can still qualify for a loan, but the interest accumulated over time could be more than double the amount of someone having a stronger FICO score.

Even out your debt

You don’t want to have one card that is at the maximum and have your remaining cards at a zero balance. It’s better to have each of your cards at an even balance than to have the most of your debt sitting on one card.

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Apply for gas station cards or retail credit

For those who have no credit or less-than-stellar credit, chain store credit cards and gas credit cards are great ways to start. They can help you begin your credit history, increase your credit limits, and stay on top of your payments.

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Don’t let your cards get dusty

Whether you’re just getting started with credit or if you’ve got older cards, be sure to use your cards to make sure your accounts stay active. Always be sure you pay them off in one or two payments.

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Stay on top of payments

Your credit score plummets with each account that goes to collections. It’s where people who have recently experienced a job loss see the biggest hit to their credit score.

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Correct your credit report

If you discover incorrect items on your credit report, contact the bureau asking that the item be removed. Pay extra attention if you have a common or same name as a family member, as it can cause a mix up on your report.

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