Make your credit history work for you

You can boost your odds if you know the score

WASHINGTON - If you're thinking of buying a house, there's one number that's more important than all the others. It's not your salary. It's not your savings account balance. It's not even the price of the house.

It's your credit score.

In just three digits, that score tells lenders just about everything they say they need to know about how likely a person is to pay back a mortgage loan in a timely manner. The more risk potential home buyers pose, the less likely they are to get loans with the lowest interest rates and the best terms. It's the rare lender who looks only at a credit score, but a low score will put you in a bad position.

What people don't know is that they can goose their credit scores relatively quickly with a few small steps, lending and credit experts say. But first they must find out what their scores are and understand what they mean.

Most consumers neglect to do that, surveys have shown. About 97 percent of people have no idea what their credit scores are, and 86 percent did not check their credit reports last year even though doing so is free, according to an informal survey by Credit.com Educational Services in San Francisco.

"Many people don't know where they stand, and they don't know that they can improve their standing," said John Ulzheimer, the group's president. "Some think their credit is good and it's not, and others think their credit is bad and it's not."

Ryan and Colleen Kelly fell into the latter category. With $30,000 in credit card debt, they figured their chances of getting the mortgage they needed to finance the home they wanted would be slim.

But this week they closed on a new home that they could buy with an interest-only mortgage that requires a very low monthly payment. In a few weeks, they'll be out of an apartment and into a townhouse in Olney, Md. Their plan is to use the money they save each month on their mortgage to pay down their credit cards.

"I definitely thought our credit is worse than it is," said Ryan Kelly, 29, an administrative assistant at the National Institutes of Health. "We don't get late payment calls or creditors calling. But we still carry a balance on our credit cards, and I was concerned that would affect our credit score."

It did. But not as much as they expected because the couple had taken steps in previous years, perhaps unwittingly, that offset the potential damage, said their loan officer, Connie Echeverria of Prosperity Mortgage, an affiliate of Wells Fargo Home Mortgage.

For starters, their credit cards had been open several years with an excellent record of on-time payments, which helps assure lenders that the couple will not fall behind on house payments.

"We as lenders want evidence that you have been(dealing) with creditors for a substantial amount of time so we can see that you are capable of repaying debt," Echeverria said. "That's what shows us that you are a good risk."

Because many home buyers do not understand that concept, they often rush to close longtime accounts in good standing before applying for a mortgage. In effect, that weakens their credit scores. Open credit cards do not hurt your credit score. What hurts is having credit cards that are nearly maxed out.

"If you're going to close credit cards, do it in a mindful way," Echeverria said. "Do not close the old ones with high limits and low balances. Close the young ones with low limits. You can't do it willy-nilly. It's a science."

Science is what helped shape the credit-scoring business into what it is today. The nation's most widely used scoring formula, called FICO, was developed by Minneapolis-based Fair Isaac Corp. and became commercially available in 1989. FICO was adopted widely by mortgage lenders in the late 1990s after Fannie Mae and Freddie Mac endorsed it.