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Credit Monitoring

Applying for a mortgage years from now? You need to get a handle on your credit today

Mortgage lenders will use new models to see how you've been managing your credit cards.

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Peopleimages | Istock | Getty Images

To secure the best possible mortgage, would-be homebuyers often spruce up their personal finances a few months before applying with lenders. But a decision by the Federal Housing Finance Agency (FHFA) last October means you need to pay close attention to your credit usage now if you want a favorable mortgage years later.

That's because the FHFA approved the FICO 10T and VantageScore 4.0 scoring models for use by Fannie Mae and Freddie Mac, meaning mortgage lenders must deliver both of these scores to the two agencies when selling their mortgages. The new models look at "trended credit data", evaluating the borrower's credit usage over a much longer period of time rather than what the current models dictate.

According to credit expert John Ulzheimer, formerly of FICO and Equifax, mortgage lenders will switch to the new models in the next 18-24 months. CNBC Select breaks down how the new scoring models will affect mortgage decisions — and what you should start doing right now to get a mortgage at a favorable rate in the future.

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How to prepare your credit for the new credit scoring models

The biggest change for potential homebuyers is the timeline they have to button up their credit usage before applying for a mortgage. "Rather than preparing for a mortgage loan 30 days to 90 days before you actually go apply, now you may want to start thinking about it even before you have decided to look for a house," Ulzheimer says.

Keep in mind the advice for managing your credit cards responsibly remains the same — and it can help both your FICO 10T and Vantage 4.0 scores and your overall financial health.

Here are some good practices to follow:

Monitor your credit

To have an idea of how you're looking to lenders, it may be wise to keep track of your credit. While you might not get access to FICO 10T and VantageScore 4.0 easily, you can use credit monitoring services to check credit card balances your card issuers report and how they impact your credit.

You might be able to track your credit in your card issuer's app. For example, CreditWise® from Capital One is our top pick for the best free credit monitoring service and provides access to your VantageScore 3.0 from TransUnion. Discover Credit Scorecard gives you updates on your FICO Score 8 from TransUnion.

Discover Credit Scorecard

  • Cost

    Free

  • Credit bureaus monitored

    Experian

  • Credit scoring model used

    FICO

  • Dark web scan

    Yes

  • Identity theft insurance

    No

Terms apply.

Pros

  • Provides updates on your FICO Score
  • Performs regular dark web scans
  • Has a credit score simulator

Cons

  • Only monitors one credit bureau report
  • Doesn't offer identity theft insurance

Alternatively, you can monitor your credit with a credit bureau. Experian Dark Web Scan + Credit Monitoring is a convenient service offering a comprehensive look at your FICO Score 8 based on Experian data.

Experian Dark Web Scan + Credit Monitoring

On Experian's secure site
  • Cost

    Free

  • Credit bureaus monitored

    Experian

  • Credit scoring model used

    FICO®

  • Dark web scan

    Yes, one-time only

  • Identity insurance

    No

Terms apply.

If you have card debt, pay it down

Under the current scoring models used by lenders, you may have been carrying credit card debt for years, but so long as you pay it off a month or two before your mortgage application, you can still receive a good deal.

That all changes when lenders begin scrutinizing your credit with the new scoring models.

"You might want to start paying down your credit card debt now, because in two years, the scores that mortgage lenders use will be able to see back in time two years," says Ulzheimer. "So paying off the month before, while still fantastic... is not going to yield the same benefit."

One way to pay down your credit card debt is by using a balance transfer card. Applying for a card such as the Citi® Diamond Preferred® Card or the Wells Fargo Reflect® Card could net you a 0% intro APR period of 21 months on qualifying balances. The the Citi® Diamond Preferred® Card offers a 0% intro APR for 21 months on balance transfers; 18.24% - 28.99% variable APR thereafter. Balance transfers must be completed within 4 months of account opening and there's a balance transfer fee of 5% of each balance transfer; $5 minimum. The Wells Fargo Reflect® Card offers a 0% intro APR for 21 months from account opening on qualifying balance transfers; 18.24%, 24.74%, or 29.99% variable APR thereafter. Balance transfers made within 120 days from account opening qualify for the intro rate, BT fee of 5%, min $5. That's almost two years to make payments on your debt without having to also deal with interest charges.

Citi® Diamond Preferred® Card

On Citi's Secure Site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% for 21 months on balance transfers; 0% for 12 months on purchases

  • Regular APR

    18.24% - 28.99% variable

  • Balance transfer fee

    5% of each balance transfer; $5 minimum. Balance transfers must be completed within 4 months of account opening.

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See rates and fees.Terms apply.

Wells Fargo Reflect® Card

On Wells Fargo's secure site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.

  • Regular APR

    18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers

  • Balance transfer fee

    5%, min: $5

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See rates and fees. Terms apply.

Keep your credit utilization ratio low

To look your best to lenders using the new scoring models, keep your credit card balances low at all times. This will show consistency in your credit patterns and that you don't rely heavily on your credit lines — both red flags to any institution considering whether to loan you hundreds of thousands of dollars.

The best practice is to pay your card balances in full every month. This will be good for your credit scores (no matter the model) and your budget, since you won't have any interest payments cutting into your finances.

Why are the credit models changing?

Ulzheimer compares credit scoring models to the iPhone. While Apple comes up with new smartphone models to give you all the exciting new features (or to take away the headphone jack), FICO and VantageScore create new scoring models that better predict lending risks.

FICO 10, FICO 10T and VantageScore 4.0 are the most current generations of credit score models, but mortgage lenders haven't adopted them yet. Instead, banks use the following older scoring models when evaluating your mortgage application:

  • FICO® Score 2 (Experian)
  • FICO® Score 5 (Equifax)
  • FICO® Score 4 (TransUnion)

All these scores consider the same credit factors: payment history, credit utilization, new credit inquiries, types of credit you use and length of your credit history. Each model weighs these factors slightly differently when calculating your credit score. But there's one thing they have in common: when evaluating your credit utilization, the models only focus on the present moment.

What is a credit utilization ratio?

Your credit utilization ratio is the amount of revolving credit you're using compared to the credit limit. For example, if you have a card with a $3,000 limit and a $300 balance, the ratio is 10%. It's generally recommended to use less than 30% of your available credit to avoid damage to your scores.

FICO 10T and VantageScore 4.0, on the other hand, offer a much deeper view of how you manage your cards, according to Ulzheimer. Instead of looking at the snapshot of your current card usage, these models view how you've been managing your cards for the last two years. They check how often you pay off your balance, whether you're consistent in how you use your card, and other factors that help lenders determine how you in general handle credit.

That's why your card usage will become much more important if you're hoping to become a homeowner. While this might seem like added scrutiny, it's always beneficial to know and implement healthy credit card habits.

Bottom line

The thought of keeping your card usage in check years before buying a home might feel overwhelming. However, the same card practices you'd implement to keep your wallet happy apply to the new scoring models mortgage lenders will soon start using.

"Everything about this is good," Ulzheimer says. "People who [use credit responsibly] are going to score higher within the models, which means they're going to get better deals from mortgage lenders. There's absolutely nothing negative to say. And trust me, I've tried to find it."

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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