When applying for a loan, your credit score is one of the primary factors mortgage lenders consider. A higher credit score suggests a lower risk of loan default, increasing the chances of loan approval and more favorable terms.
A credit score is a three-digit number between 300 and 850 that shows the borrower’s creditworthiness based on their bill payment history, length of credit history, credit utilization, credit mix, debt, and other financial information. Lenders use credit scores to evaluate the risk of lending money to borrowers and establish the terms and conditions of loans, such as interest rates and loan amounts. A higher credit score often translates to lower interest rates.
There are ways to quickly improve your credit score if it is lower than you would like. To be eligible for a home mortgage will require a minimum credit score of 580. Lower scores have more potential for improvement, and even small changes can lead to significant score increases. Depending on the factors that are lowering your score, you may be able to increase it by as much as 100 points in a relatively short period of time.
Here are some quick ways to improve your credit:
- Always make on-time payments – Payment history, reflecting on-time payments, is crucial, accounting for 35% of your overall credit rating. Missing payments can negatively affect your credit for up to 7½ years. If you miss a payment by 30 days or more, contact the creditor immediately, pay as soon as possible, and ask if they can stop reporting it to credit bureaus. It’s essential to get current on the account promptly since your credit score is negatively impacted each month an account is marked as delinquent. Set up reminders and use automatic payments to cover at least the minimum amount to avoid missed payments. The impact of delinquent payments lessens over time, and adding positive credit accounts can speed up recovery.
- Maintain a low credit utilization rate – Maintain a credit utilization rate below 30%. Credit utilization is the total amount of credit used divided by the total amount of credit extended to you. To reduce your credit utilization, you can lower your credit balances or request a credit limit increase from your card issuer. Having more available credit will result in a lower credit utilization ratio.
- Refrain from closing credit card accounts – Closing a credit card, especially if it’s no longer in use, will negatively affect your credit score and credit utilization ratio. It may also shorten your credit history length and limit your overall credit mix, which are essential credit factors. To keep an inactive credit account active, consider setting up automated payments for a recurring bill.
- Avoid applying for other financial products – If you’ve applied for credit before, you might have encountered a hard credit inquiry, also called a “hard pull.” Generally, a hard inquiry can lower your credit score. If you intend to apply for a mortgage soon, refrain from applying for other financial products like credit cards or new phone plans.
- Take advantage of a credit builder program – Credit-builder programs help consumers with no or limited credit and those aiming to improve their credit scores. The lender provides a loan, and the borrower decides payment amounts and frequency. Payments are reported by the lender to credit bureaus, potentially boosting their credit.
- Be added as an authorized user on someone else’s credit card – If you have a trusted friend, partner, or family member with a credit card account that has a high credit limit or a good history of on-time payments, consider asking them to add you as an authorized user. This allows you to benefit from the primary user’s positive payment history. The account holder doesn’t need to grant you card access or even share the account number for your credit to improve. Keep in mind that if the primary user misses a payment or makes a late payment, it will reflect on both parties’ credit reports.
- Dispute errors on your credit report – You have the right to obtain free reports from the three major credit bureaus. Review them for errors like late payments marked when paid on time, incorrect credit activity, or outdated negative information. Once identified, dispute the credit report errors. The credit bureaus must investigate and respond within 30 days.
- Address collections accounts – By paying off a collections account, you eliminate the risk of being sued over the debt, and the collection agency to stop reporting the debt after payment. Since a collections account is a significant negative mark on your credit report, having the collector cease reporting it can be highly beneficial.
- Receive credit for rent and utility payments – Rent reporting services can include your on-time rent payments in your credit reports. Including your rent records in your credit report can be beneficial when potential creditors review it, as a lengthy history of consistent payments can work in your favor.
- Diversify your credit mix – Adding a new credit account in good standing can boost your credit, especially if it’s a type of credit you don’t currently have. For example, if you only have credit cards, getting a credit-builder loan can be a cost-effective option. Ensure the loan reports to all three credit bureaus. On the other hand, if you mainly have loans or few credit cards, getting a new credit card may be beneficial. It not only improves your credit mix but also reduces your overall credit utilization by increasing available credit.