What Are The Best Ways To Improve A Credit Score?
One of the most important steps to buying a home is getting approved for a mortgage. One of the biggest factors as to whether a buyer gets approved for a mortgage are their credit scores.
A buyers credit score impacts whether or not a buyer can obtain a home loan or not, first and foremost. In addition to the impact a buyers credit score has on their ability of getting a mortgage, it also can greatly impact the mortgage interest rate a buyer is able to receive.
A buyer with an impeccable credit score can expect to have a better interest rate than a buyer whose credit score is average. In fact, the difference in a mortgage interest rate can vary sometimes as much as 1.5%, which will make a huge difference in the amount of interest paid over the life of the home loan.
Since the mortgage approval process is one of the most critical steps to buying a home, it’s vital that buyers position themselves in the best possible place before discussing mortgages with a lender. Buyers who have strong credit scores greatly improve the chances they’re able to get approved for a mortgage and get the best interest rate.
If you’re wondering how to improve your credit score in order to buy a home, below are 12 tips for doing so. Following these tips can take credit scores from average to amazing, which will go along way in the mortgage approval process!
How Do Credit Scores Work?
Before we dive into the 12 tips to improve your credit scores in order to buy a home, it’s first extremely important that you understand how credit scores work. One of the top mortgage mistakes made by home buyers is not reviewing their credit report and scores.
The first thing that needs to be understood about credit scores is the impact it can have on consumers. A persons credit score is a reflection of their creditworthiness. Mortgage companies review credit scores to help determine whether lending money to someone is a safe investment. In addition to mortgage companies reviewing credit scores, others who look at credit scores include car dealerships, credit card companies, cell phone companies, insurance companies, and even potential employers.
As you can see, credit scores impact many things for consumers! It’s important to also understand how credit scores are calculated. A persons credit score is calculated by taking into consideration 5 categories. The 5 categories that makes a credit score are payment history, debt percentage, length of credit history, new accounts/credit requests, and the type of credit accounts, often referred to as credit mix.
The weight, or percentage, of these 5 categories which add up to 100% will vary depending on the credit bureau. The 3 credit bureaus in the United States are Equifax, Experian, and TransUnion. The percentages for the 5 categories are generally as follows;
- Payment History – 35%
- New Accounts/Credit Requests – 10%
- Length of Credit History – 15%
- Total Debt Percentage – 30%
- Credit Mix – 10%
The highest credit score that can be obtained is an 850. Consumers with credit scores under 600 are often considered risky borrowers while borrowers with credit scores of 720 or greater are considered very solid borrowers.
Credit Scores & Mortgage Approvals
As mentioned above, credit scores can impact the ability of getting approved for a mortgage for buyers as well as the interest rate. While preparing to get a mortgage to buy a home, it’s important to understand what lenders are typically looking for in terms of a potential borrowers credit score.
Mortgage lenders have different guidelines when it comes to minimum credit scores. Some lenders will approve a buyer with a 600 credit score while others require a 640.
Buyers often wonder which type of mortgage is best and it’s important to keep in mind that each buyers circumstances are different so the best way to find out if they’re able to get approved for a mortgage is to speak with a local mortgage lender!
What Are The Best Tips To Improve Your Credit Score In Order To Buy A Home?
Whether a buyer has a poor, an average, or an exceptional credit score, there generally is room for improvement. Below are 12 of the best tips to improve your credit score which will come in handy if you’re looking to buy a home.
1.) Be Aware Of What Your Credit Scores Are
One of the more obvious tips to improve your credit score in order to buy a home is to be fully aware of what your credit scores are in the first place. It’s surprising the number of consumers who have no idea what their credit scores are.
The internet has made it extremely easy for consumers to monitor their credit scores. Free websites such as Credit Karma, allow consumers to continually monitor their credit scores.
Credit Karma, and many other websites, have apps that are compatible with most smart phones. These apps allow consumers to see their credit scores, total debt percentage, number of open accounts, credit history length, and number of recent credit inquiries.
2.) Get Current On Any Delinquent Accounts
Just because someone misses a payment on a bill doesn’t mean that they should forget about it. Another tip for improving credit scores in order to buy a home is to get current on any delinquent accounts.
Catching up on late payments can increase a credit score relatively quickly once a credit report reflects the payment. Accounts with missing payments can destroy a buyers credit score so it’s important to stay current on all accounts!
3.) Dispute Any Errors On Your Credit Report
Yes, you’ve read that correctly, it’s very possible there can be errors on credit reports. It’s extremely important that if there are any errors on your credit report, you dispute them.
Disputing errors on a credit report can be done pretty easily nowadays, thanks to the internet and technology. Most creditors allow consumers to dispute errors online and the review process is much quicker nowadays when comparing to 10 years ago.
4.) Eliminate Disputed Accounts From Your Credit Report
While the internet has made most peoples lives easier, it also has increased the number of people who’re having their identities stolen. It’s not uncommon for a credit report to have accounts on them that’re actually not supposed to be on them.
If there are incorrect accounts on your credit report, it’s extremely important they’re removed. Removing disputed accounts from a credit report can improve a credit score relatively quickly.
The best way to get a disputed account removed from a credit report is to contact the creditor directly. It’s likely the creditor is going to request some type of proof, which in the case of identity theft, is some type of relating documentation.
5.) Pay Off or Lower Balances On Accounts With Small Balances
It’s pretty common for mortgage lenders to require home buyers who have average credit scores to pay off accounts with small balances. The reason mortgage lenders require home buyers to pay off accounts with small balances is because it changes their income to debt ratios. A buyers income to debt ratio is a factor that can have a large impact on mortgage pre-approvals.
If you’re unable to completely pay off accounts with small balances, lowering the balances can also go a long way with improving your credit score. It’s recommended that before paying off or lowering balances with small balances, you discuss with a mortgage lender to make sure you’re selecting the best accounts!
6.) Pay Off or Lower Balances On Accounts With High Interest Rates
It’s possible that paying off or lowering balances on accounts with small balances is not the best option but rather you target accounts with high interest rates! Paying off or lowering balances on accounts with high interest rates can be a great way to improve your credit scores.
Depending on the type of account, it’s feasible that you’re paying crazy amounts of interest on monthly bills. For example, some credit cards have interest rates of 20% or higher! Paying off or lowering the balances on these high interest accounts can potentially mean extra money each month to use towards a down payment on a home.
A great tip for saving for a down payment for a home is reducing monthly debts and not throwing away money each month to pay interest on bills is a great way to accomplish this!
7.) Pay Bills On Time
Paying bills on time may seem like a silly tip for improving a credit score because it’s so obvious, but it needs to be discussed. Another important tip for improving your credit scores is to pay all bills on time.
Since payment history is the category that is weighed the heaviest, simply making on time payments will go along way to improve your credit score. If making a payment on time is not feasible, it’s important that it’s not ignored!
Consumers who cannot make a payment for whatever reason just decide to not make a payment, which is a mistake. It’s suggested that if you’re unable to make an on time payment that you contact the company or organization to give them the heads up. Most companies will often work with consumers to setup a payment plan that is acceptable to both parties.
8.) Don’t Close Old Accounts
Seeing as credit history is one of the determining factors of credit scores, closing old accounts can actually do more harm than good. If you have old credit cards that haven’t been used in years, DO NOT close these accounts. By closing old accounts, you could be potentially hurting your credit history length.
For example, if you have an average credit history of 6 years and decide to close a credit account that’s 10 years old, you’re credit history is likely going to be less than 6 years after closing the 10 year old account. It’s important to realize that if you have old accounts, especially credit card accounts, that you use these accounts periodically to avoid them being closed by the company automatically.
9.) Don’t Keep Opening New Accounts
Many consumers believe that opening new accounts will improve their credit scores. Opening new accounts can actually do the complete opposite and can destroy a credit score, so to improve your credit score, don’t keep opening new accounts!
Why does opening new accounts hurt a credit score? One of the reasons opening new accounts can hurt a credit score is because when a new account is opened, generally, a credit inquiry is pulled. Too many credit inquiries can negatively impact a credit score.
10.) Open Secure Credit Lines, Only If Necessary
There are some circumstances when a potential home buyer doesn’t have enough credit lines showing on their credit reports. In this case, it maybe necessary to open a new credit account.
Mortgage lenders who’re working with potential borrowers who need to improve their credit scores by opening new credit lines will typically suggest secure lines of credit. A secured credit line is one which a borrower uses an asset as collateral to secure the account.
Mortgage lenders will often suggest secured credit cards to borrowers who don’t have enough established credit lines. Once a buyer obtains a secured credit card, lenders will suggest making small purchases each month and paying off the balance each month. By doing so, a borrower can improve their credit score by making on time payments and also is establishing a credit line in the process.
11.) Work On Your Credit Utilization Percentages
Credit utilization percentages impact consumer credit scores, so it’s vital you’re aware of your percentages. Generally speaking, consumers with credit utilization percentages of 10% or less are consider to have excellent ratios.
To improve your credit scores, it’s important that you always keep your credit utilization percentages in mind. If you’re planning on making a large purchase and have the option to use cash or a credit line, it’s suggested you use cash. Making a large purchase on a credit card can drastically change a borrowers credit utilization percentages.
12.) Contact A Professional To Help With Improving Your Credit Score
Discussing your financial circumstances with others is sometimes not the easiest task. The above 11 tips for improving credit scores in order to buy a home maybe exactly what you needed to learn about, but this may not be the case for everyone.
If you’re struggling to improve your credit scores, it maybe time to contact a professional to help improve your scores. There are businesses and organizations that are designed exclusively to help consumers to improve their credit scores.
As a Rochester NY real estate agent, anytime a potential buyer requests assistance with their credit, I always provide them with information for a local organization that can help. The Consumer Credit Counseling Service of Rochester is an organization that’s designed to help consumers with their credit.
Before getting started in the process of buying a home, understanding the importance of credit scores is huge. There are very few consumers who have a perfect 850 credit score, so being aware of these credit score improving tips above can go a long way. If you’re looking to buy a home in the near future and are trying to improve your credit scores, following these tips will definitely help!
Other Helpful Home Buying & Home Financing Resources
- Tips For First Time Home Buyers
- Guide To Understanding Credit Reports & Scores via Kevin Vitali
- How Do Student Loans Impact Getting A Mortgage
- Reasons Why Home Buyers Are Denied For A Mortgage via Bill Gassett
Are you working towards the goal of buying a home in Rochester? If you’re in need of tips for improving your credit scores, the above 12 should provide a great start! If you don’t have a buyers agent yet, contact me and I’d be happy to help get started with the process!
About the authors: The above article “12 Tips To Improve Your Credit Score In Order To Buy A Home” was written by Kyle Hiscock of the Hiscock Sold Team at RE/MAX Realty Group. With over 30 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.
We service the following Greater Rochester NY areas: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton, Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush, Honeoye Falls, Chili, and Victor NY.
© 2017, Kyle Hiscock. All rights reserved.