A good credit score signifies that your financial health is in tip-top shape. So, it’s the first thing lenders check when you apply for a home mortgage. The higher your score, the easier it is for you to get loan approval and the best interest rates.
To get the lowest interest rates, you need to target getting a credit score of at least 740. Hence, building your credit score is the most sensible thing to do before applying for a mortgage. And here are seven surefire ways you can give your credit score a boost.
1. Review Your Credit Reports
You have to know where you stand to improve. So first, run your credit report and get your initial credit score.
Below are the credit score ratings using the FICO scoring model.
- Poor – 300 to 579
- Fair – 580 to 669
- Good – 670 to 739
- Very Good – 740 to 799
- Exceptional – 800 to 850
Then, scrutinize every detail of your credit report. You’ll be surprised to see some inaccuracies reflected in your credit report. False information brings down your credit score.
To check your credit score for free, go to Annual Credit Report. If you find any inaccurate information, dispute it immediately with the credit bureau.
2. Learn how your score works
You can’t improve your credit score if you don’t understand how the scoring system works. Most lenders use the FICO credit score system which is determined by these five components:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Types of credit used: 10%
The payment history has the biggest chunk of influence on your credit score. So, if you have old debts in your name such as student or car loans, reflecting them in your credit report works in your favor.
It would also help if you pay your recurring monthly bills using your credit card. This will not only simplify your bill payments but also boosts your credit score when you pay your balances on time.
3. Lower your credit utilization to 30% or less
Credit experts advise utilizing 30% or less of your total credit limit. This makes sense considering that “amounts owed” are the second most important factor in the FICO credit score calculations. The less credit you have, the better.
To keep your credit card utilization low, pay your balances in full or keep your total outstanding balance to 30% or less. Or, ask your bank to increase your credit limit.
4. Get a credit-builder loan or a secured loan
To lay down your track record as an excellent borrower, you need to have accounts in your name. These accounts must be reported to the major credit bureaus—TransUnion, Equifax, and Experian so you can have a credit history. Your credit history will then be the basis of calculating your credit score and debt to income ratio.
Related Read: 5 Creative Ways to Save for A Mortgage Down Payment
5. Pay off your debts
Your credit score measures your creditworthiness or your ability to pay loans back. But this isn’t the only qualifying factor lenders use to evaluate your creditworthiness. They also check your debt to income ratio (DTIR). It’s the ratio of how much money you make, how much you spend, and how much is left over.
Credit experts recommend a debt-to-income ratio of 43% or below to qualify for a mortgage. If your DTIR is higher than that, then it’s best to pay your debt first before buying a house.
But don’t get discouraged if your DTIR is high, or if lenders give you a loan amount that could barely cover the amount of your dream house. It’s just your baseline to know where you stand so you can create a strategic plan on how to improve your finances.
6. Use credit wisely
To maintain a good credit score, be consistent about paying your bills on time and pay the full balance on each billing cycle. If your finances are tight, this could be a stretch for you. How to avoid this situation? Simple—do not spend more than what you can afford to pay for any given month. We know that’s easier said than done, but it’s not impossible to do. If you pull this off, you’ll get rewarded with zero charged interest.
If paying the full balance is out of the question, make sure to pay at least the minimum payment required and don’t miss the due date. You’ll get a triple whammy if you miss it or fail to make payment—you’ll get charged a late payment fee, your interest rate is raised to penalty rate, and it can wreak havoc on your credit score.
7. Keep your credit cards open
If you have no good reason to close your old accounts, such as poor service or high fees, keep your credit cards open.
Keeping old accounts open will increase your average age of accounts—the third most important factor in the FICO scoring system. Closing your accounts will only decrease your overall credit limit and increase your credit utilization ratio. And as a result, lowers your FICO score.
To qualify or enjoy the best interest rates, you must first build your credit score. If your credit score is anywhere between poor or fair, don’t worry, you can still improve it by following the tips above. Your credit score gets better with time, so just give it a while and be consistent in practicing good credit habits.
If you’re planning to buy a home, Poplar Homes has an exclusive product called Poplar StreetCred that helps its residents achieve their dream of becoming homeowners. StreetCred allows qualified Poplar renters to earn 20% of their monthly rent as credits towards a future home purchase.
Earn credits from your rent with StreetCred. To get started, rent with Poplar Homes.