Investing your time and energy to improve your credit score is a smart move. Your credit score – a three-digit number used by lenders to determine your ability to repay debts, is an important measure of your financial health. The impact is two-fold: not only will better credit scores make it easier to secure loans, higher scores can qualify you for the lowest available interest rates, which can save you thousands over the life of your mortgage.
If you’re planning on buying a new home, you already know you need a solid credit score to secure a mortgage. However, what do you do if your credit score is lower than you’d like? Depending on what’s holding your score back, there’s plenty you can do to boost your score before applying for a mortgage. Improving your credit score takes time but is more than worth the effort. Here are some ways you can give your credit score the boost it needs.
Review your credit reports (you can request a free report from each of the three main reporting agencies each year) and check for mistakes. Inaccurate information can lower your credit score so its important that any information on your report is accurate.
Check for mistakes like missed payments that were made on-time or other negative marks like foreclosures, bankruptcy, charge-offs or collections that are too old to remain in your report. Credit bureaus have 30 days to investigate your dispute and respond.
Pay your bills on time
Lenders are especially interested in how reliably you pay your bills. That’s why payment history is the single biggest factor in calculating your credit score. It shows lenders that you’re responsible you’re your credit and is a good predictor for future performance.
Late payments or settling an account for less than you owe lowers your score. Not only that, but missed payments can stay on your credit report for seven years. Get in the habit of paying your bills on time (and get current on any missed payments). Use calendar reminders or set up automatic payments to help you stay on top of your monthly bills.
Pay off debt and keep balances low
Your credit utilization ratio is another important number to know. It’s calculated by adding your credit card balances and dividing that by your total credit limit. Lenders prefer to see a credit utilization ratio of 30% or less. That shows you manage your credit well.
The best way to accomplish this is to pay your credit card balances in full each month. If you have current debt, create a payment plan to start chipping away at the debt. Each month you pay down your debt, the better your credit utilization becomes.
Limit new credit requests
Only open new credit accounts if you need them – opening new lines of credit to have a better credit mix won’t improve your credit score by much.
There are two different types of credit inquiries: hard and soft. Soft inquiries are typically initiated by you or a company. These inquiries are usually used for preapproval offers or background checks and don’t not affect your credit score. In contrast, hard inquiries are applications for credit that requires access to your full credit report. When you apply for a credit card, mortgage, or loan, the lender will process a hard inquiry to review your credit worthiness. An occasional hard inquiry is unlikely to affect your credit score, but having several hard inquiries in a short amount of time can impact your score.
Keep your old accounts open
Its tempting to close out old, unused credit cards but that could actually hurt you in the long run. Closing an old account will shorten your credit history and lower your available credit, which can increase your utilization ratio. Instead, use that card to pay for a small bill (like a streaming service) and set up automatic payments to take care of the bill each month.
You’re not alone if your credit history isn’t where you want it to be. Thankfully with some time, you can see major improvements. Boosting your credit score improves your ability of getting the kind of mortgage you want.
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