How to Improve Your Credit Score Before Applying for a Mortgage

Understanding Your Credit Score

Your credit score is a crucial factor that lenders consider when you apply for a mortgage. It represents your creditworthiness and can significantly impact the terms of your loan, including the interest rate. Knowing how to improve your credit score before applying for a mortgage can save you thousands of dollars in the long run.

Average credit scores typically range from the high 600's to low 700's. A perfect score is 900, affectionately known as a unicorn in our industry. Most mortgage lenders look for a score of at least 650. With a score lower than that, you start to have less options and may pay a higher interest rate. Understanding the factors that influence your credit score is the first step in improving it.

Check Your Credit Report

Before you can improve your credit score, you need to know where you stand. Obtain a copy of your credit report using Borrowell, or directly from Equifax or Transunion.

Review your credit report for any errors or discrepancies. Mistakes such as incorrect account information, late payments that you made on time, or accounts that don’t belong to you can drag down your score. Dispute any inaccuracies with the credit bureau to have them corrected.

Pay Down Outstanding Balances

One of the most effective ways to improve your credit score is to reduce your credit card balances. Your credit utilization ratio, which is the amount of credit you’re using compared to your credit limit, accounts for 30% of your credit score. Aim to keep your credit utilization below 50%.

Focus on paying down high-interest debt first, as this will save you money on interest payments over time. Consider consolidating your debt with a personal loan if it offers a lower interest rate than your credit cards.

Make All Payments on Time

Your payment history is the most significant factor affecting your credit score, accounting for 35% of it, so it's essential to make all your payments on time. Set up automatic payments or reminders to ensure you never miss a due date.

If you have any past-due accounts, bring them current as soon as possible. Contact your creditors to negotiate a payment plan if you're struggling to make payments. Consistently making on-time payments will gradually improve your credit score.

Avoid New Credit Inquiries

Each time you apply for new credit, a hard inquiry is recorded on your credit report, which can slightly lower your score. Multiple inquiries within a short period can signal to lenders that you’re a higher risk. Therefore, avoid applying for new credit cards or loans while you’re preparing to apply for a mortgage.

If you need to shop around for the best mortgage rates, do so within a short time frame. Credit scoring models typically consider multiple inquiries for the same type of loan within 14 to 45 days as a single inquiry, minimizing the impact on your score.

Keep Old Accounts Open

The length of your credit history accounts for 15% of your credit score. Closing old credit accounts can shorten your credit history and reduce your score. Keep your oldest accounts open, even if you don’t use them frequently, to maintain a longer credit history.

If you have a credit card with a high annual fee that you no longer want to use, consider downgrading it to a no-fee version instead of closing it. This way, you can keep the account open without incurring additional costs.

Conclusion

Improving your credit score before applying for a mortgage takes time and effort, but the benefits are well worth it. By checking your credit report, paying down balances, making timely payments, avoiding new credit inquiries, and keeping old accounts open, you can boost your credit score and secure a better mortgage rate.

Start working on your credit score as early as possible to give yourself the best chance of getting approved for a mortgage with favorable terms. Remember, a higher credit score can save you thousands of dollars over the life of your loan.