Debunking Your Credit Score

If you’re considering buying a home, one of the first things you need to do — in addition to figuring out how much home you can afford — is take a look at your credit score. Seen as an indicator of your overall dependability and financial prudence, this all-important three-digit number, which ranges from 300 to 850, has literally become an outright measure of character.

Here’s what else you need to know:

720 is the new black
Prior to the housing collapse, a credit score of 620 or more qualified you for the best mortgage rates.  Until recently, a credit score of 680 was something to be proud of. Today, our analysis of more than 25,000 loan quotes and purchase requests shows that you need a score of 720 or above to get the best rates.

620? Forget about home ownership
Nearly one-third of all consumers have a credit score of about 620, according to myFICO.com. What kind of interest rate does that get them?  None — they’re unlikely to receive any loan quotes, even if they offer a relatively high down payment of 15-25%.

It’s your life’s report card
Lenders aren’t the only ones looking at this three-digit numerical summary of how much you owe and how promptly you pay your bills.  In addition to landlords, cell phone, insurance and utility companies, hospitals and health-care institutions are also starting to check this number, as are an increasing number of employers. In fact, about 35% of them do, according to the Society for Human Resource Management. Why? Bad credit can be a signal of irresponsibility.  Employers want someone who is going to focus on the job, not worry about their financial woes.

Just boost it!
While you probably have a basic understanding of how a credit score is calculated — your payment history is the most important factor, accounting for 35% of your score  — Fair Isaac does not reveal the exact formula used. Regardless, with so much at stake — mortgages, insurance policies, car loans and more — know that the easiest way to improve your score is to pay your bills on time, pay down your debt, and watch the credit card spending, utilizing no more than 30% of your available credit; ideally, just 10%.

Vera Gibbons is a financial journalist based in New York City and is a contributor to Zillow Blog. Connect with her at http://veragibbons.com/.