Lenders use many factors to evaluate a customer’s loan application, and credit scores are one important factor. Based on the information in your credit report, a credit score is generated. The better your credit is, the more likely it is you will be approved for a loan, at the best possible interest rate the lender has to offer.
So before you apply for a mortgage, it is important that you do whatever you can to improve your credit score, and we are offering a few helpful tips on how to accomplish that.
Knowing Where You Are
The first step you must take is to fully understand where your credit report and credit score currently stand. In order to improve, you must be aware of your current credit status.
Begin by accessing your credit reports. By law, the three major credit bureaus – Equifax, Experian and TransUnion – must provide you with one free credit report from each bureau every 12 months.
Carefully examine your credit report and score. This is the baseline from which all improvements will be measured.
Knowing How Credit Scores Are Formulated
FICO scores are the preferred choice of top lenders when making lending decisions. Because your FICO score is so critical to your overall loan application, you should have some awareness of how the score is formulated.
FICO scores are determined by analyzing both the positive and negative information in your credit report. The data is weighted into five main categories:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- New credit: 10 percent
- Types of credit used: 10 percent
Every lender has its own criteria with regard to how they underwrite new loans, but you should be aware of exactly how important your FICO score is to the process.
Reduce Your Debt
The “Amounts Owed” category on your credit report accounts for 30 percent of your score. Therefore, paying down your credit card balances to at least 30 percent of your total limit is an effective way to give your score a boost. Keeping your debt balances low can have a major impact on your FICO score.
Avoid Late Payments
Late payments and collections cause major damage to your credit report, and once a delinquent payment is recorded on your report, there's not much you can do to resolve it.
Paying your bills on time and avoiding late payments is the only way to maintain a positive payment history. Habitual late payments are one of the worst things to appear on a credit report.
Three Simple Rules
There are three simple rules for improving your FICO score:
- Pay all bills on time, every time
- Keep balances on credit cards low
- Apply for credit only when you need it
Keep revolving credit card accounts to a minimum. Several revolving accounts on a credit report is a red flag and will be seen as an inclination towards overspending.
Don’t Wait Until the Last Minute
It is very important to approach the mortgage process with the best possible credit position, but don’t wait until the last minute to improve your scores. Finding and correcting credit card errors could take months of effort, so give yourself ample time.
For further information about how to improve your credit score, please check out our previous article.