Improving your credit score is very important to your financial health. The lower the score the more risky you are perceived by the lenders, which is reflected in being charged a higher interest rate on your loans or being denied credit altogether if the score is below a required minimum.
Before laying out the tactics for how to improve your credit score, let’s talk about how credit scores affect mortgage loans. Yes, I said scores, not a score, because virtually all of us have three credit scores from three credit reporting agencies: Experian, Equifax and Transunion.
Which one of those credit scores actually matter? The answer is the median one (or the lower if you only have two scores). For example, if your scores are 700, 710 and 720, the score used for loan qualification purposes is the middle one: the 710.
The qualifying credit score determines your loan’s interest rate and the rate paid on mortgage insurance (if applicable). If too low, it can immediately disqualify you from obtaining a loan, even if other positive factors exist. Simply put, if your score is too low, you might not qualify for a loan regardless of how much money you make or the size of your down payment.
We are not a credit repair service and we cannot comment on the claims that those services make regarding an immediate improvement to your credit scores, but we want to provide you with some simple and common solutions to improve your credit scores.
The two biggest components of your credit score calculation are 1) the amount of debt you carry on your credit cards and other revolving lines of credit, and 2) making payments on time. If your score is below a desired level and there are some late payments that occurred within the last 12 months, there is little you can do to fix it (short of jumping into your Delorean and getting up to 88MPH) except to ensure that all future payments are made on time (on time usually means within 30 days from the due date).
The lower your total revolving debt, relative to the total revolving limit (aggregate of all credit card limits), the better the credit score. If your total revolving debt level exceeds 30% of the total revolving credit limit, there is quite a bit you can do to improve your scores by paying down that debt.
Keep in mind that neither one of those paths provides an immediate improvement to the score. Making payments on time and paying down the debt will take a few months to take effect.
What if you don’t have much credit history due to your young age or the fact that you are one of the lucky few that had gone through life without having to borrow much? The easiest and the fastest way to build credit history is by responsibly using a credit card. If you don’t have a credit card and have a limited credit history, your best bet is a secured credit card.
Here’s how a secured credit card works: you provide a cash collateral equal to the amount of the credit limit, which allows the credit card provider to recoup their losses in case you end up not paying off the balance. Secured credit cards, once fairly popular with major banks, are now pretty much only offered by credit unions and smaller community banks, but it’s worth asking your bank regardless.
A first-time home buyer might be surprised at how much credit score affects the interest rate on a mortgage loan. To see customized mortgage rates that are tailored to your situation, and take into account rate changes based on credit score, check out our mortgage calculator and borrower tools.
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