How your credit history influences a mortgage rate

Your credit history contains information about your borrowing and payment practices. Your credit card payments, car leases or department store credit cards report your payment habits to three major credit agencies in the US: Equifax, Experian and Trans Union. If you have not already, you should get a credit report which shows your history from there agencies.

When you are buying a home, mortgage lenders will probably look at your credit report and calculate your score before they quote you mortgage rates. Exact scoring models vary from one home loan lender to another. You can get your Equifax FICO score at the credit agency's web site. The report calculates the total score and comes with helpful tips for improving your credit score.

Factors that influence your credit score include:

Payment history: Have you paid your bills on time, declared bankruptcy or were referred to a collection agency in the past several years.

Outstanding debt: How much debt you already have outstanding - car loans, credit cards, mortgage loans and other loans. The outstanding debt is compared to your credit limit - if you have borrowed close to your credit limit, that would have a negative effect on the score.

Length of your credit history: your credit history has to be sufficiently long.

Number and type of your existing credit accounts: if you have too many credit accounts, that may have a negative effect on your score.

Number of credit inquiries: If you have applied for too many new accounts recently, that may negatively affect your score.

Other information about you: a credit model may take into account your job or occupation, length of employment, if you own any real estate, and other factors.

Tips for improving your score:

A better score will help you find better mortgage rates for your home loan. General guidelines to improve your credit score under most credit scoring models:

• concentrate on paying your bills on time,
• pay off your outstanding balances,
• do not take on new debt;
• Maintain only a reasonable amount of unused credit since having ready access to thousands of dollars of debt may lower your credit score.

It will probably take some time to improve your score significantly since credit scoring models look at a payment pattern over several years. You may find that your credit report contains inaccuracies and errors. It is especially important when you know you will be applying for a mortgage to contact credit agencies and remove such errors from your file.