Two Cents - Insights Brought to you by Vectra Bank

Remember how stressful it was to receive your report card as a kid in grade school? In many ways, the credit report is essentially the adult equivalent, with the credit score being one's GPA, so to speak. Credit scores may now be viewed with even more importance than ever in today's current financial environment, since many lenders appear to be tightening their credit standards. According to data from The Urban Institute, 67 percent of homebuyers approved for a mortgage in 2016 had a FICO score of at least 740. For comparison, only 39 percent buyers in 2005 reported the same.

Many banks have become more strict with their lending standards in recent years, which means hopeful homebuyers, or even current owners looking to refinance, need to be on their A game. At the same time, exactly how to maintain a good credit score remains something of a mystery. When it comes to credit history, you may be surprised at the number of factors at play.

How low can you go?

Before knowing how to improve or maintain your credit score, you'll want to know what it is first. Every American consumer is entitled to one free credit report from each of the three major reporting agencies per year. One of the best ways to get this information is through AnnualCreditReport.com. Since each agency uses different metrics to calculate credit scores, it might be helpful to check all three at once if you're applying for a home loan.

After viewing your score, maybe you're wondering how good it really needs to be to get a great mortgage. Of course, every lender will have different standards for what constitutes an acceptable score, and it doesn't always need to be pristine. According to Realtor.com, who spoke with one consumer lending professional, a score of 660 or higher will usually be enough to qualify for a loan. Some lenders, as well as the Federal Housing Administration which guarantees FHA loans, might even accept a score as low as 580.

Raising the bar

If your score is above 580, you might not have much trouble getting approved for a home loan, but the chances of getting an affordable one are slim. Interest rates on mortgages tend to rise for borrowers considered riskier, which means a low score translates into higher payments each month. So what are the best ways to boost that score higher, or at least hold it steady as you prepare to buy a home? Some of the biggest hits to your score can come from events including:

• Closing old cards: A large portion of a credit score is calculated based on your utilization ratio , according to FICO. This is your total outstanding balance on all open credit accounts divided by the percentage of total credit that's available to you. This means that people with more active cards tend to have better scores, as long as they aren't charging too much to any of them. It also means closing a card, even if you don't use it anymore, can cause your credit score to drop.
• Opening new cards: With the above tip in mind, this may seem like a paradox, but it should only reinforce responsible credit card use. Any new credit you apply for, whether it's a home loan or credit card, will usually require a "hard pull" on your credit history. This means the prospective lender is considering extending more credit to you. Several hard pulls on someone's credit history in a short time indicates to lenders that they may not be using credit responsibly, and this will lead to a lower score.
• Drowning in debt: Credit reports will also include information on any bankruptcies, late payments or past debts that have gone into collections. These could continue disrupting your credit score for up to seven years.

If this makes you nervous, take steps to understand and improve your score first. Pay down old debt and work on accumulating less of it if you're set on moving into a home soon. In the end, your future self will thank you for making the grade.

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