How Can I Fix My Credit Score Before Buying a House?

By Brandon Cornett
© 2011 All rights reserved

Reader Question: "I want to buy a house toward the end of 2011, or early 2012 at the latest. I just checked my TransUnion and Equifax credit scores. They were 538 and 527 respectively. My first question is, why is there such a big difference between them? My second question is, how can I fix my credit score before buying a house? I've been reading up on this, and I think I'm actually more confused than when I started. I guess I'm just wondering where to start."

Let me answer the easier question first. There's a difference between your TransUnion and Equifax credit scores because they come from two different companies. These companies do not share data with each other. So, while most of the information in your credit reports will be the same across the board, there will always be slight differences that result in different scores.

An 11-point difference is not unusual. The last time I checked my scores, I had a 12-point difference between TransUnion and Equifax. And like yours, my Equifax credit score was the lower of the two.

Now let's address your second question: How can I fix my credit score before buying a house?

It's a pretty big club

It probably doesn't make you feel any better, but you're not alone. Millions of Americans are trying to improve their credit scores right now. There are two major reasons for this:

1. A lot of people suffered credit-score hits during the recession. Foreclosure, bankruptcy, unpaid debts, over reliance on credit cards -- all of these things can send your credit score south.
2. In 2011, mortgage lenders are much stricter regarding the types of borrowers they'll accept. So if you want to qualify for a loan, you'll need to fix your bad-credit situation first.

Most people realize the importance of a good credit score, in terms of securing loans and overall financial health. But how do you fix bad credit in order to achieve these things? In this article, we will answer these and other frequently asked questions related to fixing a credit score.

Why you need to fix your score

Your credit score is based on the information contained within your credit reports, which are maintained by Experian, Equifax and TransUnion. You can think of these reports as a historical record of your financial behavior. The information within these reports is used to create a credit score, and this is what lenders look at (among other things) when considering you for a loan.

Simply stated, a bad credit score can ruin your chances of getting approved for a home loan, a car loan, etc. And even if you do get qualified for financing, you'll pay a lot of interest as a result of the bad score. So it's important to fix this problem, and you should start right away.

What constitutes a bad credit score?

It's hard to put an exact number on this range, because it tends to fluctuate with changes in the economy. For instance, a score that was considered "decent" in 2006 might be considered bad in 2011. So a simple definition would be this: A bad credit score is one that prevents you from getting qualified for a mortgage loan, or one that results in an extremely high interest rate if you do get qualified.

If I had to put a number on it, I'd say anything below 620 qualifies as bad because it makes it harder to achieve your goals.

There are also different scoring models in use today, so a bad score can be defined differently based on the system being used. In fact, all of the credit-reporting agencies use different scoring models. Equifax uses the "Score Power" system, Experian uses the "PLUS" system, etc. The one used by most lenders is the FICO scoring system (which stands for the Fair Isaac Corporation that created it). The FICO credit score is the one you need to be concerned with.

Let's forget numbers and titles for a moment, and revisit the definition I gave you earlier. A bad score is one that prevents you from getting a loan, or makes the loan a lot more expensive. This is what you need to fix. Now let's talk about how to fix it.

How to go about fixing it

When I talked about credit reports at the start of this article, I explained how they chronicle your financial habits. So if you have bad habits, such as being late on bill payments or neglecting them entirely, your credit reports will reflect this. And because this information is used to computer your credit score, that will be bad as well.

Want to use this graphic? Feel free. Please link back to the source.

With all this in mind, you can see that you must change your financial habits for the better if you want to fix your credit score. It's also important to review your reports once a year to make sure there they don't contain errors. This article offers some tips on fixing your score by making positive changes in your financial behavior.

I recommend that you take three specific steps to improve your score:

1. Make darn sure you pay all of your bills on time. In particular, make sure you pay your credit cards, personal loans, student loans and car payments on time. All of these things get reported to the credit-reporting companies. If any late payments get reported, they will do serious damage to your credit score.
2. Avoid closing your oldest credit account. This will shorten the length of your credit history. With all other things being equal, a longer history results in a higher score. Your oldest account is probably the first credit card you signed up for. It's okay to pay the balance down (and I recommend that you do), but you should keep the account open for now.
3. Pay down your credit card balances, as much as possible. This will lower your credit utilization ratio, which in turn will boost your FICO score. Not to mention the fact that it feels great to reduce your debt load!

This is the fastest way to fix your credit score before buying a house. You were expecting, perhaps, some complex mathematical formula? Nope. There's nothing complicated about it.

These three items will boost your FICO score faster than anything else. Don't let anyone tell you differently. If they do, they're probably trying to sell you some kind of credit "solution" services. You don't need to pay anyone for anything. You can do all of these things for yourself.