Mortgage lenders look at FICO credit scores as a sign of your ability to handle and repay debts. The better your score, the better mortgage terms they will be able to give you. But what if your credit score is less than desirable? You can take steps to raise your number, which can save you thousands on mortgage interest over the long term.
Changing your credit score will take time. Be ready to work on it over the months, possibly a year or longer. If you’re planning to buy a home and you know your credit score is less than ideal, start working on it as soon as you can. The earlier you start, the higher your score will be when you’re ready to purchase. Try these strategies to start lifting your score:
#1- Get current with past-due bills
Your payment history is the most significant ranking factors in your credit score. If you have any outstanding bills, bring them to current first. Any late payments remain on your credit report for up to seven years. Getting current can boost your score and stop the cycle of late payments being added, which saves you money.
#2- Pay on time
On-time payments play a critical role in your credit score. Any late payments you make–rent, utilities, credit card– are reported to the credit bureaus. Try to at least make the minimum payment on your credit card balance every month. Set up reminders or auto-pay for any other bills you have, including utilities and rent.
#3- Pay down revolving balances
Another factor in your credit score is your credit utilization rate, which is how much of your credit you are actually using.
Let’s say you have $20,000 in available credit, and you are carrying a $10,000 balance. You are utilizing 50% of your available credit, which is high. Having a high balance on your revolving credit card accounts hurts your score. You want to maintain a low balance relative to the credit limit. Aim to have your utilization ratio in the single digits.
#4- Try to Pay Balance Off Each Month
In addition to paying off your bills on time, try to pay off your balance every month. This goes back to credit utilization. After your payment history, it’s the second most important factor in your FICO score. If you pay your credit card balances every month, you can keep your credit utilization score low and your FICO score up.
#5- Establish a credit history
You can’t start showing your trustworthiness as a borrower until you have a track record. You need to have some open and active credit accounts in your name. The credit bureaus factor in how long you have been a borrower, so the longer you have an open and active credit card, the more it can boost your score.
If you’re unable to get a credit card, you could get added as an authorized user on someone else’s credit card, as long as they use the card responsibly. Another option is to get a credit builder loan or a secured card, which can start building your credit history.
The credit bureaus also have a few options to help improve your credit score and show your trustworthiness to borrowers.
Experian Boost: Add your utility, cell phone, and streaming service payments to your Experian credit report to help them be factored into your Experian credit scores.
UltraFICO: A free program that uses your banking history to help build your FICO score. It looks at if you have a savings cushion, how long you have been maintaining a bank account, if you’ve been paying your bills on time, and if you’ve been avoiding overdrafts.
#6-Limit new credit applications
There is a sweet spot between having too many credit accounts and too few credit accounts. In the prior section, we addressed lacking credit and credit history. Conversely, if you apply for too much credit, that can also impact your score.
Every time you apply for a line of credit, whether it’s a car, a credit card, or furniture financing, each “hard inquiry” impacts your score. Lots of credit inquiries add up over time.
#7- Use credit monitoring to track progress
The different credit bureaus offer credit monitoring services to track your credit score changes over time. Many of these services are free and will also give you access to at least one of your credit scores from the major credit bureaus. With tracking, you’ll see if your strategies are making an impact on boosting your credit score.
Raising your credit score
Not all strategies will work for every individual. Your first step should be to pull your credit score from one of the credit reporting bureaus. These reports often offer tips on ways you can boost your score. Once you know what tactic(s) apply to you, start chipping away and watch your numbers rise.
Get in touch today!
Tim Erickson
P: (652) 451-2273
E: tim.erickson@goluminate.com
W: www.TimEricksonMortgage.com
Mark Henderson
P: (651) 398-3477
E: mark.henderson@goluminate.com
W: www.MarkHendersonMortgage.com