Your credit score is a make-or-break number when it comes to applying for mortgage loans. Even a slight increase in credit score can mean saving thousands of dollars on a loan over the course of your life thanks to lower interest rates. Before applying for a home loan, you need to know your credit score and work to increase it if needed.
What Is A Credit Score?
A credit score is basically an assessment of how likely you are to repay debt. It ranges from 300-850, with anything under 600 generally considered to be bad, while a score above 670 is considered good.
A credit score is generally made up of 5 factors:
- (35% of your score) Payment History – Your history of paying credit card debt on time
- (30%) Debt-to-Credit Utilization – Debt accumulated on your credit accounts divided by the credit limit. The lower this number is, the better.
- (15%) Length of History – Longer credit history is better, since it gives more complete picture of your credit over time.
- (10%) Credit Mix – Having a variety in the type of credit card accounts
- (10%) New Credit Accounts – The more credit accounts you have, the lower your average credit history is, which hurts your score.
How Do You Check Your Credit Score?
First off, how do I check my credit score? Well there’s a couple of ways. First, you can request a free annual credit report from one of the three main credit bureaus in the US (Equifax, TransUnion, and Experian). You can also ask your credit card company itself, since some, like Discovery and Capital One, allow you to access a credit report for free.
You should do this months before you even think about applying for a mortgage, as increasing your credit can be a pretty lengthy process. But, once you have your credit score, how do you know if you need to increase it? Well, to start, the Federal Housing Administration grants loans to those with credit scores as low as 500. However, to get a loan from a lender, you’ll need a credit score in at least the mid-600s. Of course, the higher your credit score, the better loans you receive.
Ways To Increase Your Credit Score
1. Dispute Any Errors In Your Credit Report
There could be an error made on your credit report that’s dragging you down, through no fault of your own. Check your credit report for any errors made, such as incorrect/duplicate accounts, incorrect payments, information from more than 7 years ago, information from an ex-spouse, or even fraudulent accounts due to identity theft.
All of these mistakes could be negatively affecting your credit score without you even knowing, so be sure to check for any errors in a credit report.
2. Pay Off Any Credit Card Debt
While this may not be the easiest method, it is the simplest. Pay off your debts with the highest utilization rate first, as reducing those will have the greatest impact.
Paying off credit card debt will greatly help to increase a poor credit score, even if it may be financially difficult.
3. Start Paying Credit Card Bills On Time
Another simple, but not exactly easy way to increase your credit score. Similar to #2, paying credit card bills on time will naturally improve your payment history, and therefore your credit score. This may take several months, which is once again why you should check your credit and work to improve it long before applying for a mortgage.
4. Open Up A New Account
Opening up a new account, specifically a type of account you don’t already have, can actually help improve your credit score. First off, if you don’t already have a card of that type, opening one can help improve your Credit Mix. As well, opening up a new credit card can help to improve utilization and overall history, as long as it is used responsibly.
Don’t open more than one account, though. Opening up too many new credit card accounts will end up being detrimental in the long run.
5. Keep Credit Cards Open
Keep any existing credit card accounts that you have open. Use them at least a little bit every once in a while. if a credit card account is closed, it reduces your average credit history, which can hurt your credit score.
6. Become An Authorized User
This can be a good option if you happen to have a close relative with very good credit. Ask them to add you as an authorized user to their account, and as long as their credit remains good, you can reap some of the benefits. This works especially well for people with a short credit history or with bad debt-to-credit utilization.
7. Request A Higher Credit Limit
Requesting a higher credit limit from your credit card lender can help to increase your credit score, especially in the utilization category. If you have a higher credit limit, but still have the same debt, the ratio seems a lot more favorable. As long as you have a higher income, or your credit score has improved over the past few years, there’s a good chance you can increase your credit limit.