Your Credit Score Has to Be Good, but Not Perfect

By Off The ShelfSunday, October 7, 2007; F06

Whether you're considering buying a new home or refinancing an existing mortgage, credit scores matter more than ever. To find out what consumers need to know about their credit reports and scores to get the best deals, The Post's Mary Ellen Slayter recently spoke with personal finance columnist Liz Pulliam Weston, author of "Your Credit Score: How to Fix, Improve and Protect the 3-Digit Number that Shapes Your Financial Future." An edited transcript of the conversation follows.

Q: What's the most important thing consumers need to understand right now about credit scoring and mortgages?

A: Higher scores are always better. It used to be that if you had a bad score, you could still get the loan, you just had to jump through a few hoops. That's not as likely now. Standards have tightened all the way across the board, but they also seem to be changing on a day-to-day basis. The minimum score is higher. Until very recently, subprime was 620 and below. Some lenders are now setting that minimum at 660.

What's the target number that consumers should be aiming for right now, to get the best loans?
Try to get over 720 if you can. Half of the American adult population has a credit score of 700 or above, according to Fair Isaac Corp., which calculates the most commonly used score. If your score is 720 or above, you practically have your pick of loans. That's really the sweet spot. For a home-equity line, the best deals go to those with scores of 760 or above.

Keep in mind that there are different scoring formulas, including those generated by the credit bureaus themselves. Those are not the same as FICO scores, which are the ones that matter in terms of lending.

Also, you don't need a perfect score, which would be an 850 on the FICO scale. About half the calls Fair Isaac receives are from people wanting to know why they don't have perfect scores. If you're over 720, you're golden. Don't lose any sleep over it.

Is there a number below which you would say flat-out that someone should stick with renting?
I used to think that there was, but now I think everybody's situation is a little different. If you are under 660, think about what you can do to improve your score and overall finances before buying. It's not that I don't think those people should buy, I just have a feeling that people in that bracket are going to wind up in much worse situations, with less favorable loans. We're seeing vividly what happens when someone buys a house he can't afford.

When the market was booming, people would quickly get priced out of the market. There was a real risk in waiting. The penalty for waiting now is simply being able to afford more house.
How about for borrowers of jumbo loans?

I wouldn't want to say absolutely stay on the sidelines, but they might want to. Waiting a few months might get them a better deal. But as long as their credit is in good shape -- not in the 600s -- they're probably okay. The loans I know have gone away are the jumbo, subprime, stated income, 100 percent financing -- the ones that never made sense in the first place.
If someone is looking to buy in the next six months, what's the most important thing to do?
Mainly, don't wreck your credit. That means no late payments. Pay any credit card balances down and use your cards lightly. Most people don't realize that their credit reports show the balances, even if they pay them off each month. If you're using a card heavily, such as for business expenses or to earn rewards, ask for higher credit limits or make two payments a month, just to get that percentage down.

One other option -- and I am not generally a big fan of these loans -- is to borrow against your 401(k) to pay down those debts. 401(k) loans don't show up on your credit report. They're kind of off the books, as far as your credit report is concerned. Retirement funds should really be left alone, but this is a technique that can work if it's used responsibly.
One thing you should not do is close any accounts. There's this huge myth that persists that closing accounts can help your score. It can't, and it may hurt it. There's this idea out there that if you have too much credit, lenders will turn you down, but if a lender wants you to close an account, it will tell you.

And definitely don't open any new accounts -- not even a Target credit card -- until the mortgage is closed. Then you can you can go out and have a credit spree.