6 ways to improve your credit score
How to understand and improve your credit score:
An introduction to credit scores and their importance in the home buying process.
Improving your credit score is an important step in your home buying journey. For example, if you are planning to get a mortgage, your credit score is key to getting the best interest rate.
Keep reading to find out the best ways to improve your credit score.
What is credit score?
Your credit score is made up of 5 main factors included on your credit report:
Payment history: Your history of making payments towards credit cards, loans, and other accounts. On-time payments will help improve your credit score. Missed payments can hurt your credit score.
Credit utilization: How much credit you’re using versus your total credit available thru credit cards or lines of credit. If you are trying to improve your credit in order to qualify for a home loan, try to keep your credit utilization under 30%.
For example: If you have a credit limit of $8,000, keep your credit card balance under $2,400.
Credit history: How long you’ve had credit established, including the age of your oldest account and the average age of all your accounts. Lenders prefer to work with clients that have an established credit history with good payment history.
Credit mix: This refers to the different types of credit accounts you have open, including credit cards, cell phone plans, and car loans. If you have at least two different credit accounts open that you make regular payments towards, you have a solid credit mix that can help you maintain good credit.
New Credit / Credit Checks: Every time you apply for a loan, the lender will pull your credit file, and this will be recorded on your credit report. Don’t’ forget, having too many credit checks listed on your report can temporarily hurt your credit score.
Why is your credit score important when buying a house?
Especially for first time homebuyers, your credit score is one of the most important factors lenders consider when you apply for a mortgage. When lenders review your mortgage application, they look at factors such as your employment status, your income, and the size of your down payment. They also look at your credit. Good credit can improve your chances of qualifying for a loan. Good credit can also help you qualify for lower interest rates, which can help you save hundreds on your regular mortgage payments over time.
For example:
If your loan amount is $300,000 for 15 years:
- Interest Rate = 3.5% – Monthly Payment = $2,144.65
- Interest Rate = 4.5% – Monthly Payment = $2,294.98
That is $27,059 you would save on interest if your rate was 3.5% instead of 4.5%
6 ways to improve your credit score
The good news is that you can take action to improve your credit score. Here are 6 steps you can take right away. For even more help, register for our free Credit Basics for first time home buyers class here.
1) Check Your Credit Report: How to obtain a free credit report.
Whether you’re planning to buy a home, finance a car, or take out a personal loan, knowing your credit score in advance helps you understand your eligibility and the interest rates you might qualify for.
Your credit report includes your credit score along with current and previous loans, your payment history and your credit limits.
You can request a free annual report from each of the three major credit bureaus: Experian, EquiFax and TransUnion.
PRO TIP: If you stagger these requests by requesting from only one bureau every 4 months, you can keep a steady eye on your credit score and address any issues right away.
Find out more on how to access your free credit report here.
Experian, Equifax and TransUnion are the main 3 credit bureaus. They all offer the option to setup a free account where you can order your credit report as well as freeze your credit when you are not using it.
Experian even gives you your credit score as well as helpful information about how lenders see you and more.
2) Create a budget
Creating a budget is a fundamental step in managing your finances and improving your credit score. A budget is a guide that keeps you on track to meet your goals. It helps you track your income and expenses, plan for future financial goals, and ensure you’re living within your means.
Having a budget gives you the power to work toward short term goals, like creating an emergency fund as well as long term goals like improving your credit score and buying a house.
A budget helps you decide how to spend your money and helps you make adjustments to your spending if needed.
To get started, make a list of all of your monthly expenses. Then check out this handy online budgeting tool by NerdWallet.com.
3) Pay Bills on Time: The impact of timely bill payments on your credit score.
Paying bills on time will help you avoid late fees. Paying bills on time will make you eligible for lower interest rates. And paying bills on time will improve your credit score. Improving your credit score can lead to lower monthly payments on your home loan, since you can get better interest rates with a higher credit score.
Start by making a list of all of your monthly bills and their due dates. Check them off as they are paid. Set up payment reminders or automatic payments to help make sure you do not miss any payment dates.
4) Pay-down Credit Card Balances:
If you are carrying a balance on your credit card every month, the credit card company is charging you interest. Versus if you paid off your credit card debt, the money save by avoiding interest could go into savings. Or to help pay off another credit card.
Check out our free Credit Basics class to learn the best ways to pay down credit cards.
5) Regularly check your credit report & correct any errors.
Whether you’re planning to buy a home, finance a car, or take out a personal loan, knowing your credit score in advance helps you understand your eligibility and the interest rates you might qualify for.
If your credit report does not include your credit score, you should be able to login to your Experian/Equifax/TransUnion account to see your score. Also, several major credit card companies now give you access to your credit score. You will likely need to login to your online credit card account to access your score.
6) Improve your Credit History: 5 ways to establish and building a positive credit history
Establishing and building a positive credit history is important for your financial future. A good credit history can help you qualify for loans, credit cards, and better interest rates. Here are some tips to help you establish and build a positive credit history:
- Open a checking & savings account. Having a bank account gives you a foundation for building credit because it demonstrates financial stability.
- Open a credit card. But ONLY if you can pay off the balance every month. Showing regular, on-time payments will help your credit score. **Having late payments or high credit card balances will hurt your credit score.**
- Open a secured credit card. If your credit is not great, or if you cannot qualify for a standard credit card, a secured credit card that requires a deposit to open, may be an option for you.
- Avoid Opening Too Many Accounts. Do not apply for multiple credit cards or loans in a short period, as this can negatively affect your credit score. Each credit application results in a hard inquiry on your credit report.
- Keep Credit Card Balances Low. Try to pay off new purchases on your credit card in full every month. If you must carry a balance on your credit card, try to keep it below 30% of your credit limit.
Beware of credit repair scammers
Scammers insist that you pay them before they will help you. Scammers tell you not to contact the credit bureaus directly. They do not explain your legal rights and they may even tell you to lie.
Anything a credit repair company can do legally, you can do for yourself for little or no cost. The best way to improve your credit is to show over time that you pay your debts on time.
We recognize that buying a home is the single largest financial decision of most people’s lives. We also know that it is a complicated process. The Homebuyer Education Center is a resource for you.
See all of our free classes for homebuyers!
Interested in buying a home? Sign up here to receive notifications about homebuying opportunities.
This site is presented by Habitat for Humanity of the St. Vrain Valley.