It's no secret that a healthy credit score is one of the most important factors in securing the best mortgage interest rate.
If your credit score isn’t in a great place, you may still qualify for a mortgage, however to get the most favorable interest rates, and to avoid certain fees, you may want to think about boosting your score.
It’s important to keep in mind that this won’t be an overnight process. Your credit score is based on your credit history, so boosting your credit means embracing new behaviors, and that takes time.
But, as with any process, the sooner you start, the sooner you’ll reach your goals.
1. Fix reporting errors
According to the Federal Trade Commission, 1 in 5 consumers has a mistake on at least one of their credit reports. If that applies to you, simply fixing the mistake may have an impact on your credit score, and the impact of big mistakes can be significant.
You’re entitled to one copy of your credit report from each of the 3 credit bureaus annually. If you haven’t been checking your report regularly this should be one of your first steps as you start the homebuying process.
The reports won’t show your credit score, but they will show you the credit history the score is based on, and you’ll have the ability to notify these agencies of any errors you might find. To find out how you can get your free credit report, visit FTC.gov.
Need to make corrections quickly? If you’re already in the middle of applying for a mortgage and simple errors on your credit reports are dragging down your score, ask your lender about “rapid rescore.” For a fee, you’ll get action in a matter of days. Bankrate details how it works.
2. Pay your bills on time, every time
Your payment history on credit cards, car loans, utilities, etc. is the single biggest factor in your credit score. Even a single payment that’s 30 days late can cause a 100-point drop in your score.
While you can’t change the past, the best way to fix this problem is to make sure you pay your bills on time in future. FICO considers how late you were, how many times, how much was owed and how recently it happened.
That last factor is important, and it means that even though those late payments are having a big impact now that won’t always be the case. The farther slip-ups recede into the past, the less they affect your current score.
So, if you’ve missed any recent payments, get current and stay current. Try setting up automatic payments or reminders for those times when life gets busy.
3. Pay down debt
The amount of debt you have is the second most important factor to your credit score, so cutting it down should be a big priority. Lenders don’t want to see high balances or too much of your income going to monthly debt payments.
Start with your credit cards, focusing on the cards with the highest interest rates. You don’t necessarily want to close an account once it’s paid off. Having unused credit is actually very good (more on that later).
Medical and student loan debt play a smaller role in your credit score than other loans or credit, so paying that type of debt off should be lower priority as far as improving your credit score is concerned.
4. Consolidate your debts, especially credit cards
If you have a bunch of credit cards with small balances, pay off most of them and pick one or two cards as your mainstays.
FICO doesn’t just consider the amount of credit card debt you have, but also how many cards that debt is spread across, and it’s worse if the same debt is spread all over the place.
You can consolidate debt with a balance-transfer card, or a personal loan that may have a lower interest rate.
5. Don’t apply for more credit cards
Every time you apply for credit, the creditor does a “hard inquiry” on your credit report, which can cause your credit score to fall.
Maybe that doesn’t sound fair, but there’s data behind it: According to myFICO, people who have six or more hard inquiries on their credit reports are eight times more likely to declare bankruptcy than people who don't have any.
While home, car, and student loans all affect your score, FICO’s scoring formulas assume that you're shopping around for the best loan. The FICO score also doesn’t count multiple inquiries in 45 days against your score. Credit cards have a much greater affect on your score.
This is important to keep in mind when you’re in the process of applying for a mortgage. Applying for a credit card can cause your score to drop and might affect your loan eligibility.
Don’t worry about the impact of checking your score yourself. That registers as a “soft” inquiry and won’t hurt your score.
6. Get your credit card balances under control
We’ve mentioned before that just because you’ve paid off a credit card doesn’t necessarily mean that you want to close the account. That’s because the FICO score also takes into account your “debt utilization ratio”, which is the amount of credit debt you have compared to the amount of credit available to you.
For example, a person with a who has maxed out a credit card with a $2,000 limit might have a lower score than someone with a $2,000 balance on a card with a $6,000 limit.
This ratio is calculated by the total amount of debt and credit you have available to you, so having credit cards with a 0 balance can help your credit score.
Generally, you want your balance to be roughly 30 percent of your limit.
Keep in mind that if you don’t have any credit at all, it will affect your ability to qualify for a mortgage because you won’t have a credit score for lenders to refer to. If you’re in this situation, you may want to apply for one or two credit cards and get in the habit of paying off the cards every month to show that you are a reliable borrower.