Your credit score is an important factor when it comes to buying a home. That’s because it gives your lender a snapshot of how responsible you’ve been as a borrower through your payment history—which means they can assess how responsible you’re likely to be as a borrower going forward.
Here’s the thing, though: The housing doors don’t swing shut simply because your credit score is less than perfect. There are plenty of programs out there that can assist lower-credit borrowers, and APM has the inside track on all of them.
If you have a little time before you buy a home, however, it’s not a bad idea to increase your credit score before applying for a loan. Here are a few tips to improve and raise your credit score.
Check Your Credit Report
Don’t wait until you’re applying for a mortgage to discover that your credit score isn’t where you want it to be. You’re entitled to one free credit report from each of the three main reporting agencies, which you can obtain for free at AnnualCreditReport.com.
Be sure to go over these reports as thoroughly as possible, noting anything that may be inaccurate, questionable, or confusing. You can then contact that credit bureau or card issuer for more info. It’s important to clear up any errors, so don’t overlook this step!
Pay Your Bills on Time
Making payments on time—every time—matters. That’s because your credit account payments represent about 35% of your FICO score.
Think of your credit score like a diet. It doesn’t make sense to throw the entire diet out the window because you ate a few chips. Instead, you want to course-correct and vow to do better next time. The same is true with credit scores.
One late payment shouldn’t lead to another, and then another, because who cares? Your credit’s blown anyway, right?
While these late payments will ding your credit, committing to doing better moving forward will have a much larger impact on your score. So do whatever you can to get your bills paid by the deadline. Use email or calendar reminders that alert you well in advance of when a payment is due. If possible, set up auto-pay.
This takes the legwork out of paying bills, though you do have to make sure your bill is accurate and that you have the funds in your account to cover the auto-debit. You also have to update your payment information anytime you switch banks, update credit cards, or deal with a lost or stolen credit card.
Reduce Your Debt Load
Paying down or paying off revolving debt, such as credit card debt, can certainly increase your credit score. Aim to keep your credit utilization ratio below 30%. This means you should use only 30% or less of your available credit limit on each credit card.
If you’re tackling credit card debt, you can either consolidate your debts into one streamlined monthly payment or focus on paying down the cards with the highest credit utilization ratios. For example, if you’ve used 85% of your AmEx limit, you’ll want to tackle that before you put any extra money toward your auto loan.
Now, that doesn’t mean you stop paying your auto loan. It simply means that any extra funds and attention go toward the AmEx to get that credit card balance down.
Manage Cards and Accounts Responsibly
Having a mix of different types of installment and revolving credit accounts from different credit card companies can be a good thing … as long as you manage your credit mix and debt responsibly. (That was sounding so fun, wasn’t it?)
So what does a “responsible account holder” look like? It looks like someone who doesn’t max out their credit accounts. Someone who makes their monthly payments—including auto loans, student loans, credit card balances, and other debts—on time consistently. This person also keeps their balances low, therefore keeping their credit utilization ratio low.
Another thing you may not know about this “responsible account holder” is that they also keep their paid-off credit cards open. It might sound—and feel—so good to close out that credit card that took forever to pay off. We hear you, but here’s the thing: That’s actually the opposite of what you want to do.
Closing a credit account hurts your score. It also lowers the amount of credit available to you, which could end up increasing your credit utilization ratio. You don’t have to keep that credit card in your wallet. In fact, you don’t have to look at it for months on end if you don’t want to. But don’t close the account.
If you extend this logic, it’s easy to think that maybe the key to a good credit score is opening more credit accounts. That increases how much credit is available to you, right? It does, but at a cost. The credit checks it requires will hurt your score.
Lenders can also see that you applied for multiple lines of credit within a short period of time. This is kind of a red flag for them, so make sure to stay the course. Don’t close any accounts that are already open, but also don’t open any additional accounts that aren’t needed.
Reestablish Credit History
We’re here to tell you something you’ve been waiting to hear since high school: Your reputation can totally be repaired! Collection accounts don’t have a negative impact forever. You can leave past issues with credit in the past.
You can do that by reestablishing a good credit history. Pay your balances on time and pay down higher credit limits if you have existing cards and balances.
If you’ve sworn off credit cards, it may be a good idea to apply for one or two to show that you can manage your debt. Those with significant credit issues can always start with a secured credit card that requires a deposit. Place a few monthly bills or household expenses on those cards instead of paying with cash, check, or a debit card—just don’t go crazy.
We’re moving forward here, not backward. You don’t even have to carry these cards with you if the temptation to use them is too great. Sign up for auto-pay on your bills, and leave those credit cards in the back of your closet.
If you’re really going after that Credit Score Improver of the Year Award, here are a few other things you can do:
- Limit “hard” credit inquiries: These include applications for a new line of credit, such as a credit card, a mortgage, or a car loan.
- Beef up your credit file: Services like Experian Boost or UltraFICO can improve your score by using your banking history in addition to any credit history. There are also services that will report your rent payments on your behalf, which can help your score.
- Deal with your past: Resolve delinquent accounts, charge-offs, or collection accounts.
- Monitor your credit: Many credit-monitoring services are free and can help prevent fraud or identity theft by alerting you to new activity.
There you have it. Follow these simple tips to improve your credit score, and you’ll open yourself up to a variety of options when it comes to interest rates and mortgage terms. For more information on how to improve your credit, download APM’s free guide to understanding credit by clicking here.