Your credit plays a major role in determining your eligibility for a mortgage and the interest rate you’ll receive. Understanding how credit scores work, what lenders look for, and how you can improve your credit health will help you feel more confident as you move through the home loan process.
Your credit score gives lenders insight into how responsibly you’ve handled debt in the past. Higher scores generally result in better loan terms, including lower interest rates. A strong score can also expand your mortgage options, helping you qualify for a wider range of loan programs.
Lenders consider more than just the number—they evaluate your full credit profile. This includes your payment history, the amount of debt you owe, the length of your credit history, and any recent credit inquiries. A consistent pattern of on-time payments and responsible use of credit goes a long way.
Start by checking your credit report for errors and disputing any inaccuracies. Make all payments on time, reduce your credit card balances, and avoid opening new credit lines while applying for a mortgage. Small changes can add up and make a noticeable difference in your score over time.
Your credit payment history is recorded in a file or report. These files or reports are maintained and sold by “consumer reporting agencies” (CRAs). One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job. Your credit record contains information about your income, debts, and credit payment history. It also indicates whether you have been sued, arrested, or have filed for bankruptcy.
Yes, if you ask for it. The CRA must tell you everything in your report, including medical information, and in most cases, the sources of the information. The CRA also must give you a list of everyone who has requested your report within the past year-two years for employment related requests.
Credit bureaus collect and sell four basic types of information:
Identification and employment information
Your name, birth date, Social Security number, employer, and spouse’s name are routinely noted. The CRA also may provide information about your employment history, home ownership, income, and previous address, if a creditor requests this type of information.
Payment history
Your accounts with different creditors are listed, showing how much credit has been extended and whether you’ve paid on time. Related events, such as referral of an overdue account to a collection agency, may also be noted.
Inquiries
CRAs must maintain a record of all creditors who have asked for your credit history within the past year, and a record of those persons or businesses requesting your credit history for employment purposes for the past two years.
Public record information
Events that are a matter of public record, such as bankruptcies, foreclosures, or tax liens, may appear in your report.
Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, credit scoring systems must be based on a big enough sample. Remember that these systems generally vary from creditor to creditor.
Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer.
The Fair Credit Reporting Act (FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your application.
Your rights under the Fair Credit Reporting Act:
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