Gearing up your credit score before a house purchase

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert Dear To Her Credit,
If I have zero balances on my credit cards, will my credit score go down? I want to be debt free, but want to buy a house soon. What should I do?  -- Cynthia

Answer for the expert Dear Cynthia,
It's a common misconception that to build up a good credit history and score, you need to carry a balance on your credit card. If that were true, most of us would have to incur interest expenses just to get a high enough credit score to buy a house. Talk about counterproductive when you're trying to save money to buy a house!

Fortunately, paying off your credit cards should help, not hurt, your credit score. The most widely used credit score by far is FICO. FICO is upfront about what factors help and hurt your score and by how much.

Here are the five major factors that make up your FICO credit score and how paying off credit cards affects them:

Payment history: no effect. The factor that has the biggest impact on your score is your payment history. Creditors want to know if you pay your bills. It doesn't matter if you spend $2,000 on your credit card and pay it off over six months, or if you make a small purchase every month and pay it off. The big question is: Do you pay your bills on time?

Payment history is so important that FICO bases 35 percent of your credit score on this factor alone. That's why the best way to improve your credit score is the slow, steady way. Just pay those bills -- early or on time -- month after month, year after year.

Debt level: positive change. The next most important factor is your debt level. For this factor, lower is better. Paying off your credit cards can only help. Different card issuers report your balances to the credit bureaus at different times of the month, so. when you're planning to apply for a home loan, keep the balances as close to zero as possible at all times. People are often surprised when the credit report comes back showing a balance of thousands of dollars on a card. Loan officers are not impressed by protestations of, "But I pay it off every month!" Send in more than one payment per month, if necessary. If you make a large purchase, consider sending a payment immediately.

For your best credit score, keep your balances below 30 percent of your credit limit. That goes for each card and for your total available credit on all cards.

Your debt level affects 30 percent of your FICO score.

Length of credit history: no change. Paying off your credit cards has no effect on your length of credit history. You can't do much about this factor except wait. If you have several cards, hang on to the ones you've had the longest and use them at least occasionally to make sure they stay open. Your score is affected by how long you've had each account open and the last time you had activity on the account.

Length of credit history accounts for 15 percent of your credit score.

New credit: no change. New credit can hurt your score. Even one new card can cause a temporary ding to your credit score. If opening a new card fits into your long-term plan, don't let the temporary ding stop you. However, I wouldn't open a new card right before I applied for a home loan.

New credit factors in 10 percent of your credit score.

Credit mix: no change. Lenders like to see that you can handle more than one type of debt and repayment. If you only have credit card debt, but no installment debt, you won't get the highest score based on this factor. Paying a credit card balance over time does not turn it into an installment debt. An installment debt could be a car loan, for example. It does not need to be large nor do you need to string it out over a long period of time just to build up credit.

10 percent of your credit score is based on credit mix.

Paying off your credit card debt helps one factor out of five -- debt level -- and has no negative effect on the other factors. In fact, it's one of the best things you can do for your financial future. You'll stop paying your hard-earned money on interest charges and as you keep them paid off, you'll develop the mindset of only buying what you can afford to pay for immediately.

Paying off your cards can only get you one step closer to owning your home. Good luck house hunting!

See related: FICO's 5 factors: The components of a credit score, Credit card glossary terms to know when buying a house

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Updated: 12-15-2018