By Brandon Cornett

This home buying tip explains the importance of good credit and what you can do to improve your credit score.

When you apply for a mortgage loan, your credit will inevitably come under scrutiny. Mortgage lenders will review your credit closely to determining your credit “risk category.”

If your credit score is high and your risk is low, you have a good chance of being approved for a loan. If the opposite is true (low credit score and high risk factor), then you’ll likely have trouble obtaining a loan.

How to Maintain Good Credit

When it comes to credit, an ounce of prevention is truly worth a pound of cure. In other words, you should focus on maintaining good credit at all times. That way, when you’re ready to apply for a mortgage loan, you won’t have any unpleasant surprises.

Being labeled “sub prime” or “bad credit” by a mortgage lender can make the home buying process more difficult. So you should do everything possible to keep your credit score high.

There are no quick fixes with credit, only long-term strategies and good practices. Here are some things you can do to improve your credit score:

1. Pay all your bills on time. This means all your bills — credit card, auto loans, etc. Paying bills on time will raise your credit card. Having a history of late payments will lower your score and cause you problems.

2. Keep credit card balances low. Don’t let your credit balances get away from you. This will increase your overall debt, which will in turn elevate your debt-to-income ratio.

3. Keep your debt-to-income ratio at 20% or lower. Your debt should not total more than 20% of your net monthly income. If it does, focus on paying down the debt as quickly as possible.

4. Always pay at least the minimum amount. If you can afford to pay more than the minimum amount due on credit balances, by all means do so. It will reduce your balance quicker and give you a more favorable debt-to-income ratio. But make sure you pay at least the minimum amount. Paying less than the minimum will generally lower your credit score.

5. Limit the number of loans / accounts you apply for. If you apply for credit too often, it could raise a red flag that you can’t manage your finances. Use credit and loans sparingly … only when you need them.

Sure you want to improve your credit score. But don’t focus solely on the short-term. Focus on maintaining a good credit score through the practices outlined above. This home buying tip will pay great dividends when it comes time to apply for a mortgage loan.

* Copyright 2006, Brandon Cornett. You may republish this article if you keep the byline and author’s note, and also leave the hyperlinks active.

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