Your credit score is a crucial factor when applying for a mortgage. A low score can lead to loan denial, while a high score opens doors to better interest rates and loan terms. Unfortunately, data shows that due to poor credit, 15% of mortgage applications for new homes and 34% for refinancing are denied. Don’t let a subpar credit score hold you back from purchasing your dream home. Follow these six powerful tips to improve your credit score and increase your chances of mortgage approval.
1. Build credit through rent payments
If you’re a renter with little to no credit history, you may be able to build your credit profile through rent reporting services. Many landlords and property management companies offer programs that report your monthly rent payments to the credit bureaus, helping you establish a positive payment history. To take advantage of this opportunity, make sure to pay your rent on time every month. Enroll in your property management’s autopay and receive a payment confirmation or get into the habit of walking a check to their office if that is convenient.
2. Make every loan and credit card payment on time
Payment history is the most influential factor in your credit score, accounting for 35%. A single missed payment can reduce your score, so prioritize making all loan and credit card payments on time, every time. Set up automatic payments or payment reminders to ensure you never miss a due date. Tips for setting reminders include setting alarms with notes or scheduling a calendar reminder through Google or Apple calendars.
3. Keep credit card balances low
High credit card balances can weigh heavily on your credit score. Lenders prefer borrowers who use a small portion of their available credit, ideally below 30%. Aim to keep your credit utilization ratio below 30% by paying down balances regularly or requesting a credit limit increase. Get into the habit of using your credit card for daily spending that you have budgeted to pay off by the end of the month, such as groceries, gas, and other regular expenses. Pro tip: if you have a cash-back credit card, most give points for spending in specific categories, which translates to cash back on your regular spending.
4. Keep your paid-off credit card account open
After paying off a credit card, closing the account might seem like the best option to avoid spending and increasing the balance again. However, closing an old credit card account could negatively impact your credit score. It can affect your credit history, length of credit, and credit mix, which can contribute up to 60% of your credit score. To keep improving your credit score, charge a regular bill, such as a utility payment or interest service, to the credit card every month and pay off the amount in full before the due date.
5. Review credit report and dispute all errors
Inaccuracies on your credit report can unfairly lower your score. You can order free annual reports from the three major credit bureaus (Experian, Equifax, and TransUnion) at AnnualCreditReport.com. It’s important to thoroughly review each report and dispute any errors with the appropriate bureau. You can also check your credit report through a personal finance app. Checking every few months can help you catch fraud quickly if it happens to you. Be aware of any major news reports of credit card company personal information leaks, and check your credit report immediately.
6. Be patient and monitor progress
Improving your credit score takes time and consistency. Regularly check your credit score to track your progress and identify areas for improvement. Many banks, credit card issuers and personal finance apps offer free credit score monitoring services. These personal finance apps help you keep up with your credit score by doing a regular soft credit check. A soft credit pull is a credit check authorized by you or a company on your behalf that allows you to check your credit without hurting your credit score. This helps you monitor your credit score to make changes sooner.
By following these tips diligently, you can boost your credit score and increase your chances of qualifying for a mortgage with favorable terms. A strong credit score not only unlocks homeownership opportunities but also paves the way for future financial success. Stay consistent, monitor your progress, and watch your credit score rise over time.
