You’ve just closed on a new home. Don’t rest on your laurels when it comes to your credit score.
The home loan shopping and mortgage application process requires your credit score to be in its best possible shape. Lenders rely on your credit rating to gauge you as a potential borrower. The higher your credit score, the better your chances being approved for a loan and getting a favorable interest rate.
According to FICO, a homebuyer with a credit score of 760 or higher could pay nearly $2,500 less per year on a $210,000, 30-year home loan than someone with a score of 620.
Once you’ve signed all the closing documents, how important is it to maintain that stellar score? After all, you’ll want to start focusing your attention on impressing future house guests, not lenders.
There’s a good chance you’ll be using credit to make your house beautiful. A February 2018 survey by SunTrust Bank’s LightStream online lending division revealed 30 percent of homeowners planned to fund home improvements with credit cards this year, and 45 percent expect to spend $5,000 or more.
A 2018 study by the National Association of Builders predicted spending on home remodeling would increase by nearly 5 percent this year.
But no matter how comfy your new abode is, don’t rest on your laurels when it comes to your credit score.
You may need other loans later.
Consumers should always manage their credit responsibly, but new expenses and lower disposable income after buying a house can make that tricky. Nevertheless, you’ll need good credit in the future, particularly if you plan to buy a car or upgrade to a bigger house.
“Just because you bought a house doesn’t mean you’re not going to apply for a loan ever again,” said David Edwards, president of Heron Wealth.
The good news is that keeping a high credit score is easier than achieving it in the first place, if you continue to manage your finances well.
While FICO’s traditional credit scoring formula is complex, you can maintain a high score by sticking to a few good habits. Making payments on time, keeping credit card balances low and having a mix of trade lines should keep your credit score above 700, depending on the length of your credit history.
It’s also important to routinely check your score and credit reports. Credit report mistakes are common, and an erroneous negative item or identity mix-up can cost you dearly.
AnnualCreditReport.com allows you to pull your credit reports for free once a year from the big three credit bureaus (Equifax, Experian and TransUnion). The best way to keep tabs is to pull one report from each bureau every four months. CreditCards.com also offers a way to obtain a free VantageScore and TransUnion credit report any time you want.
There are also self-inflicted errors that can make your well-manicured credit score grow weeds. Many of them can result from getting in over your head with mortgage payments or relying too much on credit to cover other expenses. Like a foundation crack or faulty wiring, these credit imperfections can spoil an otherwise spotless credit report, and they take time and effort to fix.
|HOW CREDIT MISSTEPS HURT YOUR FICO SCORE|
|Credit misstep||Score loss range|
|Maxing out a credit card||30-45 points|
|30-day delinquency||80-110 points|
|Settling a credit card debt||65-125 points|
Use credit cards wisely – or not at all.
With a mortgage payment now in the mix, you may find yourself relying more on credit to fund new furniture and appliances, home improvements and even everyday expenses such as groceries and gas.
Signing up for a new credit card or two could help your score by increasing your overall available credit, but it’s best to exercise moderation when applying for cards. Each application generates a hard inquiry on your credit report that will ding your credit score by a few points. (And you’ll already have a fresh hard inquiry from your home loan.)
Store cards or store 0 percent financing deals can enable you to make big-ticket purchases such as furniture, appliances and outdoor fixtures with no interest for several months. However, many 0 percent deals charge interest on the original purchase amount – often 20 percent or more – if you don’t pay the entire balance by the end of the promotional period.
“A lot of people will just make the minimum payment without thinking, and at the end of 18 months there’s still a $3,000 balance,” said Todd Christensen, director of education at Debt Reduction Services. “If they don’t pay it all off, here comes 25 percent interest back-dated to day one.”
If you’re spooked by store cards, a regular bank credit card with an introductory no-interest deal may be more suitable. Several bank-issued credit cards allow new cardholders to carry a balance for anywhere from nine to 18 months without paying interest – and earn rewards or cash back on purchases along the way.
Additionally, a non-store card can be used almost anywhere, which may encourage you to use it for other expenses on top of any big-ticket items you’re trying to finance.
Overloading a credit card that has an introductory or deferred interest offer can put you at a high risk of carrying a balance beyond the promotional period, or worse, missing a payment. Also, maxing out a credit card can cause your credit utilization – which accounts for 30 percent of your FICO score – to spike.
If you don’t feel confident in being able to make big purchases on credit without incurring interest, maxing out your cards or missing payments, it’s best to abstain from borrowing. Instead, save the amount of money you would have spent each month to finance a costly item and buy it when you have enough to cover the full purchase price.
“A lot of us made it through college on used furniture,” Christensen said. “If we live on substandard furniture for a few months while we save money, we’ll be better off than putting it on 20 percent interest or worse.”
Plan for the unexpected.
Skipping a mortgage payment damages your credit score just as a late card payment would, but the impact could be far worse if you plan on selling and buying another new home in the near future as repeated missing mortgage payments send up red flags to lenders. Getting too far behind in paying your home loan can send your score into freefall.
Declaring bankruptcy – to avoid foreclosure, for instance – is the largest single score-killing misstep, and it can stay on your credit report for up to 10 years. Foreclosures, deeds-in-lieu and short sales are not far behind on the damage scale, potentially hammering your score by more than 100 points apiece.
To offset an unexpected job loss or serious medical emergency, which can make it difficult or impossible to keep up with your mortgage, it’s important to build an emergency savings fund with a portion of your monthly income or extra money such as bonuses, raises or tax refunds.
“If you get an annual bonus, take half of it and throw it into your emergency pot,” Edwards said. “If you get the same paycheck every month, divert $100, $200 or $500 per month into a separate account – before it even hits your checking account. People find that if money isn’t in their checking account, they don’t spend it.”
If you find yourself relying too much on credit cards to make ends meet, it’s time to cut expenses. That may include deferring some of the big plans you made for your house when you were still looking at photos of it and touring it with your real estate agent.
“It’s easy to say, ‘Be patient,’ but most homeowners have been patient for the past six to 12 months as they were looking for a home and building their credit,” Christensen said. “They want to let loose, but getting into more debt is akin to shooting yourself in the foot.”
Buying a home is a heavy lift, but keeping your financial house in order is as simple as smart budgeting and responsible use of credit. Take care of your credit score just as you would your home, and it’ll be in immaculate condition when you’re ready to make another big financial move.