Your credit score is one of the most significant factors considered by mortgage lenders when you apply for a mortgage and can make or break your mortgage application, as a low credit score could result in your application being denied. Even if your credit score is high enough to qualify for a mortgage, you’ll likely be offered higher interest rates to compensate for the risk of your lower score. However, if you have a low credit score, there are steps you can take to improve your score prior to applying for a mortgage. While there is no quick fix to improving your credit score (and you should be weary of any “credit repair” services that promise otherwise), with time and discipline, you can expect to see real improvements to your credit score.
What factors determine credit score?
Your credit score is determined by the following factors which vary in importance:
- Payment history (35%)
- Amounts Owed (30%)
- Credit History Length (15%)
- Mix of Credit (10%)
- New Credit (10%)
As you can see, payment history and amounts owed make up the biggest chunk of your credit score. This is important information to keep in mind as you work towards improving your credit score.
STEP 1: Check your credit report
The first thing you’ll want to do when working to improve your credit score is to analyze your credit report. Your credit report will outline your credit history and your current credit score. Within the mortgage industry, the following categorization of credit scores is generally accepted:
- A credit score of 740 or higher is considered Excellent.
- A credit score between 700 and 739 is considered Good.
- A credit score between 630 and 699 is considered Fair.
- A credit score below 629 is considered Poor.
To access a copy of your credit report, visit AnnualCreditReport.com to pull your report from each of the three major credit bureaus for free once a year. You’ll want to take time to analyze what is reflected in the reports and identify any possible errors, you may be surprised to find out how many Americans find errors on their credit reports. If you do find errors, make sure to dispute them so they can be corrected. You should also use the information in your credit report to determine areas in your credit history that are negatively affecting your score and make a plan to address these issues moving forward.
STEP 2: Always pay your bills on time
Because payment history is the most important aspect of your credit score, it’s critical that you make all of your payments on time if you’re looking to improve your score. If you have a hard time remembering to pay your bills on time, there are a few strategies you can try to consistently make your payments by the due date:
- Set up automated payments: most banks and services will allow you to set up automated payments for your monthly bills online. This means your monthly payments will automatically be taken out of your bank account every month on the due date and only requires some initial set up time to get started.
- If you would rather not have money automatically taken out of your bank account each month, you can set up due-date alerts to remind you when your bill payments are coming due.
- Additionally, you can set up a spreadsheet that outlines all your monthly expenses, along with their due dates, to help you keep track each month.
STEP 3: Reduce your credit utilization
Completely paying down your credit card balances each month is a great way to improve your credit score. However, if that simply isn’t possible right now, you’ll want to try to aim to keep your balance below 30% of your credit limit and then work to pay down even more each month to eventually bring that number down to 0. You can also request a credit card limit increase, which would bring down your credit utilization ratio as long as you don’t increase your spending along with your credit limit.
STEP 4: Avoid “hard” credit pulls
When you apply for new credit, the lender or credit card company will have to pull your credit, which will appear on your credit report as a “hard inquiry”. Hard credit pulls, while necessary when applying for new credit, do have a negative impact on your credit report that can last from a couple months to up to two years. While one or two hard inquiries over a longer time period will have a negligible affect on your score, multiple pulls in a short time frame can take its toll. Additionally, a lender may see the higher number of hard inquiries and conclude that you are a higher risk borrower that may be struggling financially. For these reasons, it’s best to avoid applying for new credit when you are working on improving your credit score.
STEP 5: Don’t close old accounts
If you have old credit card accounts with no balance on them, don’t close those accounts! Even if these accounts are barely used, they can be very valuable to your credit score. The length of your credit history does have an effect on your credit score and closing credit cards with no balance will only reduce the total credit available to you, potentially increasing your credit utilization ratio.
STEP 6: Sign up for credit monitoring services
Actively monitoring your credit score is the only way you’ll be able to truly know if your efforts are having their desired effect. There are free credit monitoring services out there that you can sign up for that will help you track your credit score and will alert you of any significant changes. They can also give you access to your credit report so you can regularly review your report for any errors.
If you think your credit score may need experts to help, you may want to work with a credit repair service. Your Loan Officer may be able to refer you to a reputable service.
At the end of the day, your credit score is a major consideration when you apply for a mortgage. However, it’s important to keep in mind that you have some control over your score and if you have had trouble getting approved for a mortgage, you can work to improve your credit score before applying again for hopefully a positive result! If you’re ready to dive into the home financing process, get started now!
