Everyone can benefit from improving credit scores, especially when buying a home. The higher your credit score, the better your chances of getting approved for a mortgage, it can also help you get a lower interest rate and lower mortgage insurance. Credit scores range from 300 to 850, mortgage applicants typically get the best rates when their scores are over 740. So how can you improve your credit score?
Check your credit report! Your payment history has the largest impact on your credit score. It counts for at least 35% of your overall score. It is very important to make sure you keep all your accounts current. Make a schedule of when payments are due to make sure you don’t get a late payment. When you review your credit report, if you find any accounts that are past due, catch them up as soon as possible. Make sure you make the minimum payments every month. Once you have 12 months of on time payments, your score improves. With 24 months of on time payments, the improvements are even bigger. I’ve seen one late payment drop scores by 50-100 points. As you make payments on time, it will improve your score, but the initial drop really can affect your score.
Dispute any inaccuracies! If you find errors on your credit report, ask the credit bureau to fix those errors. By law, credit bureaus have 30 days to investigate any errors you point out, unless they consider your request to be frivolous. You may need to submit documentation that supports your request. Only send copies, do not send the original forms. Within 45 days, the credit bureau should notify you of the results of the investigation. Getting even one late payment removed from your report can increase your score dramatically.
Ask for a little grace! Sometimes a creditor may be willing to help you out. If you have a late payment and it’s not normal for you, you may be able to get your payment waived. It’s worth calling a lender (mortgage, credit card or bank) and asking if they might be willing to remove a late payment – maybe there is a reason there was a late payment and the bank might take it off your credit report.
Settle collections, judgements and liens. Old collections, judgements and liens can hurt your credit score. If you have collections within the last 24 months, settle those first. Then look into older accounts. By settling older accounts, it can bring the activity date more recent and that can affect you negatively – the best option is to see if the collection company will just remove the account from your credit report.
Keep old accounts open. The length of time you have had your credit makes up about 15% of your score. So if you decide to close old credit cards, it can hurt your score. As a general rule, lenders like to see borrowers with an older average age of credit. The best way to do that is to keep those credit cards you have had for years open, as long as it’s not costing you money to do that.
Improve your credit utilization ratio. This can be a quick way to improve your score. If you have high balances on your credit cards, paying them down can make a huge difference. The utilization ratio compares your credit balances against your available credit. Ideally you want to keep your credit utilization rate at 30%. This means if you have a credit card with a $1000 limit, you want to keep your balance below $300.
Your credit score is made up of the following:
- Payment history (35%): Your history of on-time payments
- Credit utilization ratio (30%): The sum of all of your loan and credit card debt compared to your total available credit
- Length of credit history (15%): How long you’ve had credit
- New credit inquiries (10%): The frequency of inquiries and new account openings
- Credit mix (10%): This is the type of credit you have, which can include auto loans, personal loans, student loans, and credit card accounts
Remember your credit score can affect more than just your mortgage interest rates. It can affect your car and homeowners insurance, your credit card interest rates and car loans. It can also open up more mortgage programs to you that can lower your interest rates. It can increase your buying power.