How to Improve Your Credit Score

 

Your credit score grades your creditworthiness. Where you fall on a range from 300 to 850 will determine not only whether you qualify for a mortgage, but also your mortgage rate.

“The lower your credit score, the higher the risk to the lender,” HUNT Mortgage Consultant Patrick Montgomery explained. “So the lender will need to charge a higher rate to account for that risk.”

Know Your Score

Improving your credit score can save you thousands of dollars, potentially qualify you for a lower down payment, and perhaps qualify you for a mortgage that might have otherwise been unobtainable.

Before improving your credit score, you should know what your score is. There are plenty of online sites that can tell you, such as Annual Credit Report and Credit Karma, but the criteria and methodology for determining your score may vary from one site to another. Your score is fluid and will also vary based on recent financial transactions.

Lenders most often rely on a borrower’s FICO score, which is a credit score based on data from the three major credit bureaus – TransUnion, Equifax, and Experian. FICO stands for the Fair Isaac Corporation, which created the system.

The minimum credit score for a Federal Housing Administration (FHA) loan is 580, while HUNT Mortgage typically requires a score of 620 or higher. The average score is 600 to 700.

Your Credit History

To improve your credit score, start by understanding the factors that determine your score. Those factors include your payment history, amounts owed, length of credit history and your mix of credit, as well as how often you apply for new credit.

Lenders look at income, as well as debt. Your debt-to-income ratio is determined by “what’s coming in and what’s going out,” said HUNT Mortgage Consultant Emily O’Brien.

If you’re not paying off your credit card debt, if you’re not paying your rent on time, or if you’ve compiled a thick collection of unpaid bills, your payment history probably needs to be addressed.

Improving Your Score

Montgomery and O’Brien recommend the following approach to improve your score:

1. Add new credit cards. While people with credit problems are often told to cut up their credit cards, financial experts recognize that the quickest way to upgrade your credit history is to add more credit cards.

That may seem counterintuitive, but this strategy works – if accompanied by a change in behavior.

Four credit cards should suffice, as applying for too much credit in a short period can have a negative impact on your score. Each card should be used at least monthly to pay a small bill, such as a streaming service or gas for your vehicle.

2. Autopay your credit cards. Use autopay to ensure payments are made on time. Otherwise, this strategy can lower your credit score. The purpose of the new credit cards is to improve your credit history by paying bills on time. Autopay will ensure that you do.

This is especially important as your payment history accounts for 35% of your FICO score.

3. Maximize your credit limit. Lenders will look at how much of your available credit you use. The more credit you have available, the lower your utilization rate will be. If your credit card has a $10,000 limit and you charge $5,000, your utilization rate will be 50%. If your credit limit were $5,000, you would be maxed out with a 100% utilization rate.

Lenders prefer a utilization rate below 30%. Your utilization rate accounts for 30% of your FICO score.

4. Diversify your credit. Having different types of credit is also important. For example, having an auto loan and a home equity line of credit, in addition to credit cards for routine spending, will boost your credit score.

If you pay your rent, utilities, or other expenses on time, you can also self-report that information so it can be included when factoring your credit score.

5. Monitor your credit score. Regularly checking your score may motivate you to keep improving or, if your score drops, to take further action. 

It is also important to ensure that your credit report is accurate. Identity theft is common, and charges that are unpaid can have a negative impact on your score. If you find an error, file a dispute with the credit bureau that made the error.

“Once have an idea of how the system works, make sure your available credit balances are correct,” O’Brien said. “Just keep an eye on it. Hackers are prevalent.”

6. Talk to a mortgage consultant. Everyone has different needs. The best mortgage for one borrower may not be the best for another. For example, many assume that it’s best to pay down your debt. But if you have a limited amount of money available, using that money for a down payment on a home may be more advantageous than using it to pay down debt.

Your mortgage consultant will work with you to develop a plan that will help you achieve your financial goals.

Improving your credit score will not only help when you apply for a mortgage, it will also help in every financial aspect of your life – as long as you keep your credit score high.

For more information, see “What Affects Your Credit Score.”