Improve Your Credit Score

What steps should I take to improve my credit score if I want to buy a house in the next year or so?

First, check your credit record with all credit bureaus and fix any errors. You'll have a separate credit score based on your credit record from each of the three major credit bureaus (Experian, Equifax and TransUnion). Mortgage lenders usually get all three FICO scores and use the middle one. You can order a free credit report (but not free score) from each of those three bureaus every 12 months at www.annualcreditreport.com. Or you can order all three reports and FICO scores from MyFico.com for $44.85 (or $39.84 for a yearly subscription), which is a good idea to do at least six months before buying a house.

When you get your score, go to MyFico.com to see how it can affect your mortgage rate -- and how much of a difference improvements in your score can make. In mid-March, people with a score of 639 paid an average rate of 7.62% on a 30-year fixed mortgage for $215,000. People with rates of 760 to 850 (the top score) only paid 6.03%, on average.

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Then, do everything possible to keep your score clean. Make big efforts to pay your bills on time. "This is the worst time to miss a bill," says Craig Watts of Fair Isaac, which created the FICO score that most mortgage lenders use. "Pay down any large credit card or other large revolving accounts if you can, because high balances will hurt your credit rating. And avoid opening any other accounts before the loan you're pursuing is closed."

Watts says that too many people get preapproved for a loan then slack off in their credit habits before the loan is finalized. It's your record when the loan is closed that counts -- no matter what your status was like when it was preapproved. If anything changes during that time period, you may no longer qualify for those terms. "Wait until the paperwork is delivered before going out and borrowing more," he says.

And keep balances low for a while. "Creditors normally report updates to their accounts only once a month, so a consumer can't pay down the balance and expect it to be reflected on the report the next day," says Maxine Sweet of credit bureau Experian. The amount you've borrowed is what counts in your score, not how much you pay. The lender looks at your credit amount as a snapshot in time, regardless of whether you plan to pay off the entire bill immediately.

For more tips on improving your credit score, see Boost Your Score.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.