If you plan on applying for a mortgage in the future, it's crucial to manage your credit score now.

If you want a favorable mortgage years later, it's crucial to pay close attention to your credit usage now, as a decision by the Federal Housing Finance Agency (FHFA) last October means that would-be homebuyers need to spruce up their personal finances a few months before applying with lenders.

Fannie Mae and Freddie Mac have approved the FICO 10T and VantageScore 4.0 scoring models, requiring mortgage lenders to provide both scores when selling their mortgages. The new models consider "trended credit data," evaluating borrowers' credit usage over a longer period of time, rather than what current models require.

In the near future, mortgage lenders will adopt new scoring models, and CNBC Select explains how these changes will impact mortgage decisions and provides advice on how to secure a favorable rate.

How to prepare your credit for the new credit scoring models

Before applying for a mortgage, potential homebuyers should start thinking about their credit usage and prepare accordingly, as the timeline for credit usage has changed.

Responsibly managing your credit cards can positively impact both your FICO 10T and Vantage 4.0 scores, as well as your overall financial well-being.

Here are some good practices to follow:

Monitor your credit

To get an idea of how lenders view your creditworthiness, it may be beneficial to monitor your credit score regularly. Although it may be challenging to obtain FICO 10T and VantageScore 4.0, you can use credit monitoring services to track your credit card balances and their impact on your credit score.

You can monitor your credit score through various apps, such as CreditWise® from Capital One, which offers VantageScore 3.0 from TransUnion, or Discover Credit Scorecard, which provides updates on your FICO Score 8 from TransUnion.

Experian offers a convenient service that provides a comprehensive look at your FICO Score 8 based on their data.

If you have card debt, pay it down

If you pay off your credit card debt a month or two before applying for a mortgage, you can still receive a good deal, according to the current scoring models used by lenders.

When lenders start using new credit scoring models, your credit evaluation will change.

Paying off credit card debt now is recommended by Ulzheimer, as mortgage lenders will be able to see back two years in two years, and paying off the month before will not yield the same benefit.

Another way to pay off 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 give you a 0% intro APR period of 21 months on qualifying balances. 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. This means you can almost have two years to make payments on your debt without having to also deal with interest

Keep your credit utilization ratio low

To improve your chances of getting a loan from lenders, keep your credit card balances low. This demonstrates consistency in your credit behavior and shows that you don't rely heavily on credit lines, which are both warning signs to lenders.

Paying your card balances in full every month will benefit both your credit scores and your budget by eliminating interest payments.

Why are the credit models changing?

FICO and VantageScore develop new credit scoring models, similar to how Apple releases new iPhone models with innovative features.

The most recent credit score models are FICO 10, FICO 10T, and VantageScore 4.0. However, mortgage lenders have not yet adopted these models. Instead, they use older scoring models when assessing mortgage applications.

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

The credit scores take into account the same credit factors, including payment history, credit utilization, new credit inquiries, types of credit used, and length of credit history. However, each model assigns a different weight to these factors when calculating a credit score. Despite this, all models share a commonality when evaluating credit utilization - they only focus on the present moment.

According to Ulzheimer, FICO 10T and VantageScore 4.0 provide a more comprehensive view of how you manage your cards compared to a snapshot of your current card usage. These models consider how you have managed your cards over the past two years, including factors such as payment frequency, consistency in card usage, and other factors that help lenders assess your overall credit management.

Becoming a homeowner will make your credit card usage more significant, so it's crucial to adopt healthy credit card habits.

Bottom line

The thought of managing your card usage years before buying a home may seem daunting. Nevertheless, the same card habits you'd use to keep your wallet balanced will also be beneficial in the new mortgage lending scoring models.

Using credit responsibly can lead to higher scores in lender models, resulting in better deals for mortgage borrowers. There are no negative aspects to this.

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