When you apply for a loan, one of the main things mortgage lenders take into account is your credit score. Follow these instructions to raise your score before you apply if it needs work.
1. Examine your credit history and scores
Using AnnualCreditReport.com, you have the opportunity to request copies of your credit reports from Equifax, Experian, and TransUnion, which is particularly important when considering the type of mortgage you want. Take the time to review your credit scores and ensure they are accurate, paying close attention to any errors, especially those related to late payments or canceled accounts. If you spot an error, don’t hesitate to contact the credit bureau promptly to dispute it.
2. Pay all of your bills promptly.
Maintain excellent standing on all accounts. Missing a payment will lower your credit score, and late payments can harm your credit for up to seven years. Contact the creditor as soon as possible if you are currently overdue on a payment but still have time to make up the missed payment and have the late fee waived. If you have a history of making late payments, make an effort to do so going the future.
3. Pay off your credit card debt
Your credit score is determined in part by your credit usage ratio, which compares the amount you owe to the total amount of credit you have available. Better results come from a smaller ratio. As a general rule, if your usage is greater than 30%, attempt to reduce those amounts until it is below.
4. Do not open new accounts.
Your credit score will be impacted by applying for new credit. Avoid taking out additional loans or creating new credit card accounts before applying for a mortgage, as well as throughout the application and underwriting process. Likewise, avoid closing any old accounts because doing so will increase your use ratio and lower your score.
5. Get assistance from a trustworthy credit user.
If you’re a youthful first-time buyer, your credit history might not be extremely extensive. Adding yourself as an authorized user on a parent’s or relative’s credit card is one technique to improve your credit. Your parent or other family member will continue to make the payments on the primary card, but you will gain from the good payment history.
What elements go into calculating your FICO credit score?
A number of categories from your credit history are used to determine your current score. Your score will vary depending on a variety of factors. According to Equifax, one of the major credit reporting agencies, the process used to determine your FICO score often looks like this:
- On-time payment history (35 percent of score)
- Amount of debt (30 percent of score)
- duration of the entire credit history (15 percent of score)
- total new accounts (10 percent of score)
- credit product used (10 percent of score)
Your present debt typically receives classifications from credit bureaus such as “good debt” and “bad debt.” Credit card debt and other revolving accounts that don’t contribute to a valued asset are more likely to lower your FICO score than home loans and other debt that can boost your financial worth over the long term.
How quickly can your credit score rise?
Your credit report will contain information about missing payments and bankruptcy for a maximum of seven years. After a few years, they could not have much of an effect on your credit score.
The best thing you can do to improve your credit quickly—in a few months—is to settle existing debt and refrain from opening new accounts. If your credit usage ratio—the ratio of your outstanding balances to your overall credit limits—is 30% or less, lowering the balance on your revolving accounts can have a noticeable impact within a month or two. You can’t immediately change the length of your credit history or undo missed payments, but you can reduce the balance on your revolving accounts.
Raising your credit limits on card accounts within a month or two can also be advantageous because it decreases your credit utilization ratio on the other end.