When it comes to securing a mortgage, your credit plays a role in nearly every part of the process. In fact, your credit score determines if you’re eligible for a loan, the types of loans you qualify for, and what your interest rate will be. While some loans allow buyers to make up for lower scores with a larger down payment, a better way to get the best deal is to raise your score.
Since there isn’t much you can do to raise your score right away, most experts recommend you check your score at least a year before you plan to apply for a mortgage. That gives you plenty of time to address any errors as well as any other sections of your report that need work. Whether you need to up your score by a little or a lot, here are the areas where you should focus.
Get Current on Debt Payments
Your payment history counts for up to a third of your credit score, so this is an area you can’t ignore. If you are behind on any loan or credit card accounts that report to the credit bureaus, it’s important to catch up immediately. If any of your accounts have been sent to collections for non-payment, you should pay those off as well. If you can’t pay it all at once, consider setting up a payment plan.
Pay Down Debt
Your credit utilization ratio counts for another third of your score, so it’s important to keep your credit card balances well below the limits set by your bank or other issuer. If you are using more than 30 percent of your credit limit, consider paying it down. A credit utilization ratio of 10 percent or less is ideal and will significantly boost your score.
Diversify Your Credit Accounts
The number and types of your accounts play a role in your credit score too. A mixture of 10 or more different account types — credit cards, auto loans, store credit accounts, and personal loans, for example — shows that you are able to manage different types of credit. However, if you are thinking of applying for a mortgage soon, it’s important not to open or close any credit accounts if it’s not absolutely necessary. Your credit age and the number of inquiries on your account also impact your credit worthiness.
Dispute Credit Errors
If there are inaccuracies on your report, you can dispute them with the credit bureaus directly. They will then investigate the claim and take the appropriate action to correct it. In the case of late payments and collections, it is the responsibility of the bureau to validate the account within 30 days. Otherwise, they must remove it. You can contact TransUnion, Experian, and Equifax via mail, online, or phone.
Become an Authorized User
If you have a close friend, spouse, or family member with a credit card in good standing, being added as an authorized user to that account can improve your credit score. The account should be open for a long period of time, and the balance should be well below the credit limit. Credit bureaus don’t weigh this type of account as heavily as those where you are the primary owner, so it’s not a long-term fix. However, it can boost your score in order to buy a home.
Securing a mortgage can be scary, especially if your credit is less than perfect. Just remember, the best way to prepare is to know what you’re up against. Once you’ve identified problem areas, you can start to correct it. Just give yourself plenty of time, and apply as many of these tips as possible. Before you know it, you’ll be well on your way to improved credit and a home of your own.