If you’re seriously thinking about buying a home in the months ahead, you probably know how important your FICO credit score will be in getting a mortgage. A tiny section of the US population has a perfect credit of 850. Mortgage Industry experts say that even a score of 760 could make you eligible for incredible rates on auto loans, credit cards, and mortgages.
Although you could perhaps still manage to buy a house with a bad credit score, there is no doubt that a good credit score will make the process considerably smoother and more accessible. The difference between a good and fair or average credit score could translate into a difference of thousands of dollars in interest over the life of your loan.
For this reason, before you start your mortgage application, it could be a great idea to improve your credit score as much as possible for the best mortgage rate.
Though building good credit takes years of maintaining good habits, fortunately, there are several tips and hacks to improve your credit score in a matter of weeks.
Tip 1: Understand How Credit Score Works
How is the credit score viewed?
The three main credit bureaus—Experian, Equifax, and TransUnion— are responsible for producing applicant credit scores. When applying for a mortgage, the lenders usually pull all three of your credit reports and scores using each bureau’s scoring model FICO, Equifax, and VantageScore, respectively. If you’re on leave, or you’ve been recently laid off, it may feel like there’s not much you can do to improve your chances of getting a mortgage. But there are some active steps you can take to improve your credit score while you look for a new job.
Calculating your credit score
Your FICO score is calculated using both positive and negative information in your credit report. The data breaks down into five main categories:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- New credit: 10 percent
- Types of credit used: 10 percent
Tip 2: Settle Credit Report Errors
Credit report errors that have been disputed are labeled as disputed accounts on your credit report. And those disputed accounts have to be settled and closed before you apply for a loan. Since disputed accounts are not taken into consideration for the overall credit profile, the lender requires the borrower to remove or settle the error so a correct score can be calculated.
To review your credit reports for errors, start by visiting some online available tools like Annual Credit Report. This is the only website that’s federally authorized to provide free credit reports. Look through each report for mistakes such as incorrect name or address, credit lines that don’t belong to you, duplicate entries, incorrect account status, and other errors that could lead to a lower score.
You can remove disputed accounts by contacting the credit bureau and information provider and asking to have the accounts removed out of a dispute.
Tip 3: Reduce Your Debt
Once you’re sure that your credit reports are up-to-date and accurate, look for ways to reduce the amount of debt you owe. One of the major deciding factors in applying for a mortgage is your debt-to-income ratio. This number measures how much of your monthly income goes toward paying back debts. Paying off unresolved debt puts a positive impact on your credit scores, allowing you to obtain a better rate on your mortgage.
Tip 4: Seek a Credit Limit Increase
In addition to paying down debt, another easy way to improve your score instantly is by getting a credit limit increase. Although this won’t change your debt-to-income ratio, it will lower your credit utilization since your outstanding debt remains the same while your available credit increases. Often, you can request improvement and get approved instantly through your card company’s website. Sometimes, however, you’ll need to call and ask.
Tip 5: Use Credit Wisely
Pay your bills on time
Late payments and collections leave significant blemishes on your credit report, according to myFICO.com. And once you have a delinquent payment, there’s not much you can do about it. It is by paying your bills on time and thus avoiding late payment that you can maintain a positive payment history. The only way to ensure a good payment history is by doing an annual review of your report to keep an eye out for possible errors.
Keep credit card balance as low as possible
Even if you plan to pay the entire balance when your bill comes, there’s a good chance your balance is reported to the credit bureaus mid-month, making it seem like you’re using a lot of credit. Even if you are paying off your credit cards every month, you still need to keep your balances exceptionally low when applying for a mortgage.
Don’t apply for new credit
Until your mortgage has been approved, avoid chasing attractive sign-up bonuses and rewards offers. If a lender sees several credit inquiries leading up to your mortgage application, it will be a red flag. Your lender will think you are too reliant on credit.
Tip 6: Become an Authorized User
You can also instantly improve your credit score by hopping onto someone else’s! If you have a family member or a close friend with excellent credit, you could ask them to add you as an authorized user on one of their credit cards. When someone adds an authorized user to a credit card, that account’s information is reported on both people’s credit reports. If you’re attached to an account with a long, clean history, it can bump your score a bit higher.
However, do keep in mind that you’ll share both the good and the bad of that account. If the primary holder misses a payment or maxes out the card, you’ll suffer the consequences as well.
Tip 7: Don’t Close Accounts
You should avoid closing any revolving credit accounts like credit cards, even if you aren’t using them. Your available credit score suffers an immediate reduction when you close an account. If you have outstanding debt, this will cause your credit utilization ratio to jump up. Your best bet is to avoid making any significant changes until you sign your mortgage contract.
Tip 8: Request a Rapid Rescore
Once you’ve done all the hard work of cleaning up your credit, you’ll want your credit scores to reflect that. That’s where rapid rescoring can help. With rapid rescoring, you can get your credit scores updated quickly to reflect all the hard work you have been putting into improving your credit scores and thus gaining the best mortgage rate. Although not every lender offers this, if it is available, then definitely go ahead and utilize it.