Credit is a determining factor to whether you can obtain financing and at what cost for the purchase of a new home. Lenders consider credit scoring when determining the risk associated with any loan application, especially for homebuyers.

The first step in improving your credit rating is to know where you currently stand. Your credit records have been reduced to three-digit scores commonly known as a FICO, or Fair Isaac & Co, score. Assigned to you by each of the three major credit bureaus (TransUnion, Experian and Equifax), your score shows how likely you are to pay back a loan on time – the higher the score, the lower your presumed risk of default. By law, you may obtain one free report annually from each bureau online at www.AnnualCreditReport.com. By accessing your credit information one agency at a time, you can get a free credit report three times yearly.

How is it calculated?
Credit scores can range from 400 to 900 and are based on the length of your credit history, the mix of credit you already have and your number of recent credit applications. Factors include a person’s length of residence at a designated location, length and type of employment, income history, total amount of available credit, financial obligations, amount of credit used, and history of payments.

Can scores improve?
Once you obtain your FICO score you can work toward improving it. When it comes to something as important as your credit score it can take some time. Here are some tips to get you started:

  • Pay your bills on time. Your payment history, including late payments and foreclosures, can count for one-third of your credit score. Accounts more than 60 days past due will be indicated on your credit report. As the length of your on-time payments increase, so too will your score.

  • Check your credit report for errors. Removing errors, especially those negatively reflecting late payments or unpaid credit, is one of the easiest ways to improve a credit score. Look for expired negative records and file a dispute if necessary.

  • Reduce your balances. One-third of your FICO score depends on the total amount of balances you owe versus your total credit limit. Try to keep your balances less than 30 percent of your credit limit to maximize your score benefit. Start with those credit cards that are closest to their limits.

  • Keep older credit lines open. Having a long history of active accounts shows that you are a good credit risk. It also accounts for 10 percent of your credit score. Try to use your oldest cards regularly for small purchases and pay balances each month.

  • Use credit – but use it responsibly. This includes having credit cards and installment loans with timely payments. Accounting for 15 percent of your score, a balanced account including a mortgage payment can help homeowners boost their score.

  • Avoid new credit. Opening new credit will lower your average account age. In addition, the number of new applications counts for 10 percent of your score. Under the Fair Credit Reporting Act, you may limit “prescreened” offers by removing your name from nationwide lists. Apply in moderation and take on new credit only when you need it.

  • Check regularly for identity theft. Agencies may only provide your information to those with a valid need, such as a creditor or insurer. In addition, you must give consent for this information to be seen by an employer.

Consumers are advised to obtain copies of their credit reports to make sure all information is correct before applying for a loan. Incorrect information should be reported to the agency as soon as possible.