Your credit score is one of the most critical factors that lenders consider when you apply for a mortgage. A higher credit score can help you secure better loan terms, including lower interest rates, which can save you thousands over the life of your loan. If you’re planning to apply for a mortgage, here are key steps you can take to improve your credit score:
1. Review Your Credit Report
Start by obtaining a copy of your credit report from all three major credit bureaus: Experian, Equifax, and TransUnion. Carefully review each report for errors, such as incorrect account information, late payments that were actually made on time, or accounts that don’t belong to you. If you spot any inaccuracies, dispute them with the credit bureau to have them corrected.
Why It Matters: Errors on your credit report can lower your score and potentially lead to higher interest rates or even disqualification from getting a mortgage.
2. Pay Down Existing Debt
Your credit utilization ratio, which is the amount of credit you’re using compared to your total available credit, is a significant factor in your credit score. Aim to keep your credit utilization below 30%, and ideally closer to 10%. Focus on paying down high-interest credit card debt first, and consider making multiple payments throughout the month to keep your balances low.
Why It Matters: Lowering your credit utilization ratio can significantly boost your credit score, making you a more attractive candidate to lenders.
3. Make All Payments On Time
Payment history is the most important factor in your credit score, accounting for 35% of your FICO score. Set up automatic payments or reminders to ensure you never miss a due date. If you’ve missed payments in the past, focus on making all future payments on time to demonstrate financial responsibility.
Why It Matters: Consistently making on-time payments builds a positive payment history, which is crucial for maintaining and improving your credit score.
4. Avoid Opening New Credit Accounts
Each time you apply for new credit, a hard inquiry is made on your credit report, which can temporarily lower your score. Additionally, opening new accounts can increase your total debt and affect your credit utilization. If possible, avoid opening new credit accounts in the months leading up to your mortgage application.
Why It Matters: Limiting new credit inquiries helps protect your credit score and shows lenders that you’re not taking on more debt than you can handle.
5. Keep Older Accounts Open
The length of your credit history also plays a role in your credit score. Closing old accounts, especially those with a long positive payment history, can shorten your credit history and potentially lower your score. Even if you’re not using older credit cards, keep them open to maintain your overall credit age.
Why It Matters: A longer credit history with well-managed accounts indicates to lenders that you have experience handling credit responsibly.
6. Diversify Your Credit Mix
Your credit score benefits from having a mix of different types of credit, such as credit cards, installment loans, and retail accounts. If your credit mix is limited, consider diversifying it by responsibly managing different types of credit. However, this should be done cautiously and strategically, especially if you’re close to applying for a mortgage.
Why It Matters: A diverse credit mix demonstrates your ability to manage various types of credit, which can positively impact your credit score.
Final Thoughts
Improving your credit score before applying for a mortgage can make a significant difference in the loan terms you’re offered. By reviewing your credit report, paying down debt, making timely payments, and being strategic about your credit usage, you can enhance your credit score and position yourself for the best possible mortgage options. Remember, improving your credit is a gradual process, so start as early as possible to see the best results.