Most people need a mortgage to buy a home. If you hope to qualify and get the best interest rate on it, you will need to have good credit. But what if your credit score stinks? Here are six smart ways to boost your credit score. I’m certain you’ll find at least one tip that will make a difference for you!
- Know what goes into your credit score
- Boost your payment history
- Lower your utilization rate
- Increase the length of your credit history
Know What Goes into Your Credit Score
Knowledge is power! FICO is the most well-known credit scoring agency. Here’s what they say they use in their determination. Improving your performance on any or all of these factors will help boost your credit score.
- Payment History — The repayment of past debt accounts for 35% of a score.
- Utilization Rate/Amounts Owed — The percentage of available credit being used or borrowed accounts for 30% of a score.
- Length of Credit History — The length of time all credit accounts have been open accounts for 15% of a score.
- Credit Mix — The combination of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans accounts for 10% of a score.
- New Credit — The frequency one shops for new credit within a specific timeframe accounts for 10% of a score.
Boost Your Payment History
When did you last look at your credit report? More than a year ago? Never? You can snag one for free once a year from www.annualcreditreport.com. There, you can access reports from the three top reporting agencies – Equifax, Experian, and TransUnion.
Review your reports carefully. Do they show collection accounts or other black marks? These can heavily damage your score. The sooner you can get that disparaging information removed, the more you can boost your credit score.
This is important: if the collection or debt shown on your credit report isn’t yours, don’t pay it! Each credit reporting agency has its own dispute process. Filing a dispute is your first step. However, it is the collector or creditor who removes the bad information…not the credit reporting agency. The collector or creditor must remove the information from your report if:
- They can’t prove the collection or debt belongs to you. Contact all collectors or creditors and request debt validation. If they can’t prove that you owe anything, the law requires them to remove the debts from your credit report.
- They keep the collection or debt on your credit report for more than seven years. Contact the collector or creditor, show when the delinquency started, and ask to have it removed.
But what if the debt *is* yours? Sadly, paying off a debt in collection doesn’t actually raise your credit score. Once you have paid the debt, get proof that you’ve done so. Then, contact the collector or creditor and ask them to remove the information.
An account you don’t recognize could be the result of identity theft. Review your credit report regularly to help spot accounts or loans you didn’t open or authorize. The sooner you address these, the better. (You can also freeze your credit report or add a fraud alert at no charge. Find out more here.)
It doesn’t happen often, but you may spot bad information related to a valid account. Let’s say you have a credit card on which you’ve never been past due. If you see a late payment on your report, contact the card issuer and ask for proof. If they can’t provide proof, ask them to remove the negative information.
If you really did miss a payment once but have a good history, you can try writing a “goodwill letter.” Address the letter to the creditor and explain the situation that caused you to miss a payment. Then, draw their attention to your overall payment history and ask them to stop reporting the delinquency.
Lower Your Utilization Rate
According to NerdWallet.com, “It’s best for your wallet and for your score to pay balances in full and on time. Second-best? At least the minimum payment, on time.” NerdWallet recommends watching your credit utilization as a key strategy to boost your credit score. Utilization rate is the ratio of how much of your total credit limit you’re using. Keeping it below 30% benefits your credit score. FICO reports that consumers with credit scores of 800 or higher typically use less than 10% of their available credit. (Credit utilization applies not just for the aggregate of all of your credit card accounts, but for individual cards as well.)
If you have a high utilization rate and can’t pay off your balances quickly, you may be able to transfer balances to a personal loan. Qualifying isn’t guaranteed, but these loans don’t count toward your utilization ratio. They may also offer lower interest rates and simple interest rather than compound.
One last note: it’s actually helpful to leave paid-off accounts open. These contribute to the total amount of your available credit. The bigger that number, the lower your utilization ratio. Just don’t start carrying balances on them again! When you close a card, its credit limit no longer counts toward your utilization.
Did you know that credit card issuers send monthly reports to the credit reporting agencies? You might assume they do this according to the payment due date. In fact, they report based on the statement closing date. If they record your payment BEFORE the closing date, the balance they report will be lower. If your payment pays off the balance in full, they’ll report a zero balance. This is another good way to keep your utilization down and boost your credit score.
This is another way to lower your utilization. You can typically ask for an increase once a year. The key to using this tactic to raise your credit score it to resist using the higher limit. The card issuer isn’t likely to double or triple your credit limit. It’s more reasonable to expect them to agree to raise it by up to 25%. Be aware: the issuer will need to make a “hard inquiry” on your credit report to make its decision. This could drop your score by a few points. However, it will likely be a wash when your score rises because of the decrease in your utilization rate.
Increase the Length of Your Credit History
This strategy is most helpful for young people with little or no credit history of their own. Hopefully, you have a parent with a strong credit score and lengthy credit history. If so, ask them to add you as an authorized user on their credit card accounts. With most cards, your parent’s credit history length becomes yours as well. If your parent has a good payment history and low utilization rate, it should help boost your credit score. No parent? No problem. Credit card companies generally let a cardholder add anyone as an authorized user…not just a family member.
If Nothing Else, Keep “Doing the Do”
You may not be able to take advantage of all of these strategies. But it’s good to know that the mere passage of time is helpful. Delinquent payments will drop off eventually. The length of your credit history will increase automatically. Keep practicing good credit habits and you’ll see the reward.
Need Credit Repair Help? I Can Refer You!
If you have bigger credit issues and are serious about fixing them, I can help. I have a great vendor I can refer you to. Send me an email and I’ll be sure to get it to you right away!
I’m Happy to Answer Your Questions!
What questions do you have about buying or selling a home? Want to know about real estate investing or renting out your property? Need interior design or staging tips to show your home in its best light? Want to know what your home is worth, or what work it needs before you put it on the market? I can help with all of these questions and more! Give me a call at 303-204-6494 or send me an email.
One Last Thing
Check out my previous blog posts related to credit scores and qualifying for a mortgage:
- Mortgages Available Even with Low Credit (January 2019)
- Getting Preapproved for a Mortgage: The Top 5 Documents You’ll Need (January 2019)
- How Much House Can You Afford? (May 2018)
- Home Buying Myths Slayed [Infographic] (April 2018)
- Getting Preapproved Should Always Be Your First Step (April 2018)
- What is Private Mortgage Insurance (PMI)? (April 2018)
- Boomerang Buyers: Most Qualify for Financing in 2-3 Years (April 2018)
- Home Ownership: A One-Year Plan (October 2017)
- Real Help for Affording Your First Home (July 2017)