One of the key factors lenders consider when approving you for a mortgage is your credit score. This three digit number can be the defining feature in getting the rate and terms you want, so making sure it is the highest it can be when you shop for a home is essential.
How high does it need to be?
The higher the score, the better your rates will be, but in general if you can get your score above 670 you will qualify for most mortgages. Credit scores are categorized into tiers: credit scores under 579 are poor, from 580-669 are fair, from 670-739 are good, from 740-799 are very good, and from 800-850 are excellent.
After checking your credit score, you can quickly figure out which tier you fall into; raising your score into the “very good” or “excellent” category will usually result in a lower interest rate. If your score is below 670, working to bring it up into that “good” category may be the difference between getting approved for a mortgage or not.
How to Raise Your Credit Score Fast
If your score isn’t where it needs to be, but you are otherwise ready to start looking for a home, don’t worry. With some focus and effort you can raise your score, possibly more quickly than you think. Paying off all your debt isn’t necessary (and won’t even necessarily bring your score up), so understanding the factors that impact your score and working with them strategically is your best bet.
1. Consider your credit utilization rate
One of the ways your credit score is calculated is based on your credit utilization rate. This is the percentage of your credit limit that is being used on the balance you carry on any account. For example, a $2500 balance on a credit card with a $5000 limit has a 50% utilization rate.
Work to bring all of your accounts below a 30% utilization rate to quickly impact your credit score. To do this, calculate your credit utilization rate on any credit cards you have, and pay your balances down strategically based on this metric before returning to your other plan (e.g. paying down the card with the highest balance or the highest interest rate). This subtle shift in payment can make a big difference.
2. Ask for higher limits
Without making any additional payments, you can impact your credit utilization rate for the better by contacting your credit card companies and asking for a higher limit. Let’s say you owe $3500 on your card with a $7000 limit. If that card’s limit is raised to $10,000, you just changed your utilization rate from 50% to 35% without spending a dime. As soon as the new limit is reported to credit bureaus, you will see this new credit utilization rate reflected in your credit score.
3. “Piggyback” on someone with good credit
If you have someone close to you who has excellent credit, consider asking them if you can “piggyback” on theirs by becoming an authorized user on their credit card. You don’t even have to have your own card or access to the account, but the high credit limit and excellent payment history will be tied to you when the credit card company reports to the credit bureaus next. This is a quick and effective way to raise your credit score, especially if you have limited credit history and are trying to build your score as fast as possible.
4. Set up automatic payments
Late payments are one of the easiest ways to tank your credit score. If you struggle to remember to make your payments on time in spite of calendar reminders or cell phone alerts, consider setting up automatic payments. This includes payments for car loans, student loans, and any other debts you might have. Take the margin for error out of the equation and watch how quickly your credit score benefits from punctual payments.
5. Mix it up
Credit bureaus score based on how you handle debt, and a more diverse collection of credit accounts will help. If you only have a loan or two, consider opening a new credit card and using it responsibly. On the other hand, if all your credit is in credit cards, consider getting a loan to build your credit. Mix up the types of credit you have to show your ability to manage multiple types of debt responsibly. As soon as these credit accounts are reported, you will see them reflected in your credit score.
To find out more about getting pre-approved for a mortgage, schedule an appointment with one of our loan officers.
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