Consumer Credit Guide for Austin, Texas

What home buyers in Austin should know about credit reports and credit scores, as they relate to the home buying process.

For most Austin residents, buying a new home also means applying for a mortgage loan to cover the cost. Of course, if you've recently won the lottery or inherited money from a rich uncle, you may not need a mortgage loan. But for us "average" folks, buying a home in Austin goes hand in hand with obtaining a home loan.

Of course, in order to be approved for a mortgage loan, you must have a credit history behind you. And if you want to get the best interest rate on a loan, you not only need a credit history but a good credit score as well.

So in this article, we will talk about how your credit score is created, how it affects you when buying a home, and what you can do to maintain a good score. With all of this knowledge under your belt, you will likely have a much easier time buying a home in Austin, Texas!

As we progress through this article, you'll learn quite a bit about the topic of consumer credit and home buying. But let's start off with a summary of key points covered in this article:

Key Lessons In This Article

Consumers in the United States have three credit reports, one for each of the credit-reporting agencies (TransUnion, Experian and Equifax).

The information contained within your credit report is based on your financial history, such as your bill-payment habits, your debt and income, and other factors.

In turn, the information in your credit reports is what leads to your credit score, and this score is important when applying for a mortgage loan.

Austin mortgage lenders will examine your reports and scores when considering you for a home loan.

A higher score makes you more likely to be approved for a loan, and more likely to get a good interest rate as well.

A lower score means you'll have a harder time getting approved for a mortgage loan, and will pay a higher interest rate on the loan.

There are things you can do to maintain a good credit score before buying a home, and that's what we will discuss in this article.

What to Know About Credit Reports

Many Austin home buyers find the subject of credit reports rather confusing. It's easy to understand why -- there is quite a bit of conflicting information out there. So let's look at the hard facts about these reports, particularly as they relate the buying a home.

Perhaps you noticed that I've been using the plural form, "reports." That's because you actually have three. Your credit reports are created and maintained by three credit-reporting agencies: TransUnion, Experian and Equifax. These are companies, not government entities as my people mistakenly believe.

Basically, each of these three companies maintains information about your personal credit. This includes your payment habits on bills and debt, your overall level of debt, any bankruptcies or other financial issues, and related information.

So before shopping for a home in Austin or applying for a mortgage loan, you should first obtain copies of all three credit reports from all three of the companies mentioned above. There are many websites that offer your credit reports, but some of them are hoping to sell you related services such as credit monitoring. You can cut to the chase by visiting AnnualCreditReport.com, which is a website jointly maintained by the three credit-reporting agencies. You are entitled to one free credit report per year, and this website can help you obtain this entitlement.

So you've obtained copies of your credit reports. Now what? Here you are looking for two things. First, you want to make sure that all of your personal information is correct -- name, current address, marital status, etc. Secondly, you want to make sure there are no errors on your credit report that may affect your credit score (discussed later). It's not uncommon to find errors. They may be simply administrative mistakes, or they could be signs of identity theft (such as a mysterious loan taken out in your name).

If you find a mistake, you must submit a dispute through the website of the company that produced the erroneous report. Experian, TransUnion and Equifax do not share data when it comes to credit reports, so it's possible to have an error on just one report, or on all three.

Here are the dispute sections for all three companies:

Experian disputes »

Equifax disputes »

TransUnion disputes »

How Your Reports Become Scores

Without getting too far into the weeds of financial data, suffice it to say that your credit score is based on the information in your credit reports. You will also hear the term FICO score used to describe this numerical score, and they both mean essentially the same thing.

FICO is a computerized credit-scoring model named after the Fair Isaac Corporation, the company that developed it decades ago. Experian, Equifax and TransUnion use the FICO scoring model to convert your credit history into a credit score. Austin mortgage lenders will use this score to determine your "creditworthiness" — which refers to how safe or risky it would be for them to loan you money, based on your financial history.

These scores range from 300 to 850, and a higher score is always better. As of this writing, the average credit score in the United States is somewhere in the 680's. But let's talk about Texas in particular.

Average Credit Scores in Texas

According to the National Score Index (a service of Experian), Texas has the lowest average credit score (around 655) of any other state in the U.S. This is bad news for the "average" Texas resident who plans to buy a home in the near future, because mortgage lenders are paying closer attention to credit scores these days when qualifying applicants.

Keep in mind these are average numbers, and there are plenty of things that you, as an individual consumer, can do to climb above the average. Specifically, here are three things Austin home buyers can do to improve their credit scores before applying for a mortgage loan:

  1. Pay your bills on time. This is given more weight in the FICO scoring model than any other single factor. If you want to improve your credit score in the shortest time possible, be sure to pay all bills on time (and to pay at least the minimum balance due). This applies to credit card bills, auto loans, college loans, etc.
  2. Pay down your credit card balances. There's certainly nothing wrong with owning and using credit cards, as long as you're responsible with them. But a lot of credit card debt raises a red flag to mortgage lenders, and it will also drag your credit score down. Do your best to reduce your debt, starting with any credit cards you have.
  3. Limit the number of loans / lines of credit that you apply for. Applying for credit too often can send the message that you cannot properly manager your finances. Use credit and sparingly... only when you need it.

I hope you have found this Austin credit tutorial helpful, and that it makes the home buying process a little easier for you. If you would like to learn more about this subject, refer to the resources listed below, or with any questions you have.

Recommended Resources