Your credit score plays a large part in what mortgage rate you receive. Here’s how you can work on achieving a higher credit score.
Although it may not seem like it, you have a lot of control over your credit score. A small change in credit score can mean a small change in mortgage interest rate, which means a difference of thousands of dollars paid on a mortgage loan.
How Can I Improve My Credit Score?
We often don’t think about our credit scores until we are making a large purchase. There are some small habits we can make note of to improve our credit score all the time, so we’re ready when it comes time to make a large purchase:
Reduce Credit Card Balances
A credit card is a form of debt that may help your credit score in the long run. It can eventually benefit you as long as you avoid the common mistakes: carrying a balance on your credit card or high utilization rates.
Carrying a balance on your credit card does nothing to help your score. Some people think that making the minimum payment each month is enough to lead to a positive credit score, but the healthiest way to use a credit card is by paying off your balance each month, and using less than 30% of your credit limit.
Eliminate Old Debt
If you’ve applied for debt and paid it off, that record is good to have on your credit report. If you’ve paid off your car loan, there’s no reason to try to get that debt removed from your record. Even if it’s a large amount paid over a long period of time, you want a record showing that you know how to successfully pay off debt.
Address Delinquency Periods
Filing for bankruptcy will stay on your credit report for 10 years. Late payments and collection accounts can remain on your credit reports for up to seven years. If you have a bad debt on your record, it may be useful to call credit agencies after 7 years, as mistakes are occasionally made and these mistakes might stay on your record.
Avoid Late Payments
A common method used to pay off multiple sources of debt involves paying off smallest debts first, and moving on to the larger debts as time goes on. A crucial part of this strategy is to pay the minimum amount on all debts, and dedicating the rest of the money to paying off that smallest debt. Do not forget to pay the minimum amount on any debt! Although it may seem more important to save for a big-ticket item or pay more towards a certain debt, paying late on anything will leave a negative mark on your credit report and negatively affect your credit score.
Monitor Your Credit
You should always keep tabs on your credit score to stay updated and adaptive. It’s a common myth that inquiring into your own credit score will negatively affect your credit score. Checking your own credit score is known as a soft inquiry. It will not affect your credit score in any way. You are entitled to check each of the three credit bureau reports (Equifax, Experian, and TransUnion) for free once every 12 months. If you schedule these reports throughout the year, you can have an almost constant update on your score.
A hard inquiry will impact your credit score. These occur any time you apply for a line of credit, and a potential lender checks your credit.
Understand Shopping Periods
You may know that an application for credit will temporarily lower your credit score for one year. This may make you afraid to apply for too many options.
If you’re applying for something like an auto loan, the credit bureaus understand that you may be applying for multiple lines of credit, but ultimately only accepting one. Within a certain shopping period, these applications for credit are only counted as one.
FICO Scores will ignore any other inquiries made within the previous 30 days. If you are rate-shopping for a mortgage, any other inquiries made in the last thirty days will not be counted in your score, giving you a more fitting rate. If you wait too long, your other inquiries may begin to have an affect.
Interested in learning about mortgage options for borrowers with poor credit?
Other Tips for Improving Your Credit Score
Do have a credit card
It’s a common myth that applying for a source of credit will lower your credit score. While your credit score might drop a handful of points when applying, showing healthy spending habits with your credit card will end up improving your credit score in the long run.
Open multiple credit cards
It seems illogical, but having multiple credit cards could help you. One of the keys to a good credit score is low utilization on your credit cards, and this is one way to achieve that. If you are responsible enough to make your payments and keep utilization low, multiple credit cards can help you improve your credit score and take advantage of cash-back rewards.
Pay off your debt rather than consolidating
If you’re seeking to improve your credit score before applying for a home loan, you should begin to pay off smaller debts. If you have debt on a credit card that you don’t use, plan to pay off that debt rather than closing the account and paying after. Having the same amount of debt while having fewer open accounts may look worse on your credit report.
Each lender has different values—choose the lender that delivers on their promises.
At Homesite Mortgage, we know that not every lender keeps your best interests in mind. That’s why we’re committed to prioritizing your needs in every decision through the home mortgage process—including offering you the best available interest rates. That’s the Homesite Mortgage promise.
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