How to Fix Your Credit Score Before Applying for a Mortgage
Your credit score tells lenders how creditworthy you are. The higher your number, the more likely you are to qualify for loans and credit cards with favorable terms. If your credit score is lower than you’d like, here are a couple of ways to boost it.
Get a Free Copy of Your Credit Report
Step one to boost your credit score is knowing your current number. Everyone is entitled to one free credit report from the three nationwide credit bureaus (Equifax, Experian, and TransUnion.) You can also get one from a credit scoring site or your financial institution.
Each bureau uses different credit scoring methods (FICO versus VantageScore), so your score may vary from one to the other. Both methods value payment history and care less about credit variety and inquiries. FICO gives more weight to your debts than VantageScore, which favors duration of credit.
Your credit score falls into one of five categories.
- Excellent: 781-850
- Good: 661-780
- Fair: 601-660
- Poor: 500-600
- Very Poor: 300-499
An easy way to monitor your credit score is with SavvyMoney. United Federal Credit Union (United) offers the credit score simulator inside your Online Banking account. Once you sign-up, you will see the SavvyMoney credit score guide every time you login to your account.
While you should always try to improve your credit score, it’s more urgent if you are at Fair or below. At that point, you may be approved for credit, but not at a competitive rate.
Dispute Credit Report Errors
Getting your credit report is an opportunity to dispute errors. Some of the most common mistakes on credit reports include incorrect personal information, mistaken accounts, and inaccurate credit limits. You also should flag any debts over seven years old or debts from a former spouse.
If you catch any of these inaccuracies, tell your credit reporting company. Detail each item in the report you dispute and why. If possible, add supporting documents to bolster your claim. You can use this sample dispute letter from the FTC to get started.
The credit reporting company will review your claim and respond, typically within 30 days. If your disputes are approved, they will send you the results in writing, along with a free copy of your updated credit report. They will also send notifications to anyone who received your report in the six months.
Pay Your Bills on Time
Timely bill payments and good credit scores go hand in hand. Every time you pay on time, you're helping to strengthen your credit score a little bit. That’s because credit reporting companies consider past payment performance a good indicator of future creditworthiness.
Conversely, late or minimum payments will likely hurt your credit score. These delinquencies stay on your credit report for seven years, with recent ones receiving more weight than old ones. Setting up autopay or calendar reminders can help you make scheduled payments.
Looking to stay on top of your expenses? We have you covered. Mint is the gold standard with its easy-to-use budgeting tools, bill tracking, and customizable categories. It’s also free. Other worthwhile apps include EveryDollar, PocketGuard, and You Need a Budget.
Lower Your Credit Utilization Ratio
Want to impress your lender? Have a low credit utilization ratio. It’s the sum of your credit card balances divided by your total limit. For instance, if you charge $1,500 a month and have a $10,000 credit limit, your credit utilization ratio is 15 percent.
Lenders like to see credit utilization ratios under 30 percent. This suggests you know how to manage your credit and aren’t liable to max out your cards. One way to improve your ratio is to increase your credit limit. The higher your limits, the more flexibility you have when borrowing money.
Settle Your Debts
Debt is a part of life. It is what enables us to buy homes, start businesses, and cover unexpected emergencies. Lenders want to see you are responsible with your debts and paying them. If you have any outstanding debt collections, contact your creditor about paying them off immediately.
Remember, your debt actively influences your credit utilization ratio. Paying it off and keeping credit card balances low will positively impact your ratio. If you have debt, such as a mortgage or auto loan, continue paying your balance on time, and you will likely see your credit score rise.
Diversify Your Credit Strategically
The operative word here is “strategically.” You should only open new lines of credit if you need them. Ideally, you have a mix of installment accounts and revolving credit. Installment accounts have uniform payments over a set time, like mortgage, auto and home equity loans. Revolving credit, such as credit cards and HELOCs, lets you determine the payment amount.
That said, don’t apply for too many credit cards or loans at once. Each application generates a hard inquiry against your credit report. Too many hard inquiries will ding your credit score.
In the meantime, don’t close unused credit cards. As long as those accounts don’t charge an annual fee, they improve your credit utilization score. Owing the same amount but having fewer accounts can only lower your credit score.
The Bottom Line
A good credit score gives you better options when borrowing money. Making a habit of on-time payments and increasing your credit limit ensures those options, along with your credit score, continue to rise. If you need to improve your credit score, get a copy of your credit report and work from there. Fixing errors and resolving debts provide helpful bumps to your purchasing power.
