Mortgages & Financing
Credit Scores
First-Time Homebuyers
3 easy ways to increase your credit score before applying for a mortgage
Credit scores are confusing, but can dictate a lot about the outcome of your mortgage terms. Here are three easy tips that you can start right now in order to increase your credit score and ensure the best possible conditions for applying for a mortgage.
Niamh GyulayContent Marketing Specalist
5 min read
Being ready to apply for a mortgage is exciting, and a major step in your financial story. You want to be as prepared for this step as possible, and one thing that sometimes gets overlooked by prospective homebuyers is their credit score. While your credit score might be “good enough” to get a mortgage, a higher credit score can impact a lot of important factors in securing the best loan terms. The good news is, you don’t need to make any major steps to improve your credit score. Here, we explore three easy steps that you can start doing today to boost your creditworthiness before you apply.
Before you go trying to manipulate your credit score for the better, it’s important to know what it is exactly that goes into your credit score:
What is it?: Your credit score is a number (ranging from 300-900) that is derived from your credit report. It’s essentially a snapshot of your creditworthiness.
Why does it matter?: Lenders (like banks and mortgage brokers) use this score to help them decide whether to approve you for credit, the amount they will lend, and the interest rate they can offer you. A higher score usually means better interest rates and better terms.
How is it determined?: Your credit score is calculated using a formula often called a scoring model (like a FICO) based on your credit report. While the formulas are proprietary, the factors and their approximate weights are well known:
→ Payment history accounts for approximately 35% of your credit score, tracking all your debts (credit cards, loans, utility bills, etc.) . Late or missed payments can have a negative effect on your score.
→ Amounts owed & credit utilization accounts for approximately 30%, tracking the amount of debt you owe, especially as a percentage of your total available credit (your credit utilization ratio). Keeping this ratio low (ideally below 30%) is crucial.
→ Length of credit history accounts for 15% of your credit score, which just tracks how long you’ve been using credit. Generally, lenders like to see long established histories of reliable credit management.
→ New credit & inquiries account for 10%, the number of new credit accounts you have recently opened or applied for in a short period of time can sometimes negatively impact your score.
→ Credit variation accounts for about 10% of your score as well, meaning it keeps track of the variety of debts you’re able to manage, like car payments, credit cards, lines of credit, and the like.
Now that we have the basic idea of what’s contributing to your credit score, here are three easy tips that you can start doing right now to increase your credit score before applying for a mortgage.
1. Pay your bills on time, every time
Your payment history is the single most influential factor in your credit score. Generally, payment history accounts for 35% of your credit score calculation. Lenders like to see a reliable pattern of you paying back what you borrow.
Some ways to do this is to set up auto-pay when you can, and reminders when you can’t. This removes the human error, and allows you to stay on top of your bills, even at your busiest.
While you’re setting up those autopays and reminders, catch up on your “past dues”. If you have any accounts that are late, pay them right now. The longer you let it go, the worse it is for your credit score. Start a perfect on time record right now.
2. Master your credit card balances (the 30% rule)
Paying your bills on time is the most important thing impacting your credit score, but credit card balances are a close second. Your credit utilization ratio (the amount of revolving credit you’re using of your total credit limit) is best when it sits around or below 30%. So, if you have a $10,000 credit limit, try not to use more than $3000.
Also, paying down high balances can help you get on track to a better credit score. This can lead to positive changes that will occur quicker than other methods.
If you have a good relationship and payment history with a credit card company, you can ask them for a credit limit increase. Note that this is not to spend the new available credit! This is to lower your utilization ratio. For example, if your credit limit is $7000, and you are consistently using $2500 of credit (35% of $7k), and want to increase your utilization ratio, you can ask for a credit limit increase to $10,000 to decrease your utilization ratio to 25%, which will increase your credit score.
3. Stop applying for new credit
In the few months leading up to your mortgage application, it’s best to avoid any major credit-related moves. Avoid applying for new credit cards or loans. When you apply for credit-related products like that, the lender performs a “hard inquiry” on your credit report. A lot of “hard inquiries” in a short period of time temporarily lower your score and make lenders nervous, suggesting you’re urgently seeking credit, even if you’re not.
As well as not starting any new accounts, you also don’t want to close any old accounts. It may seem logical to close an old credit card you don’t use, but this often can hurt your score. Closing an account reduces your total available credit (increasing that utilization ratio) and shortens the average age of your credit history. Keep those old accounts open, even if you only use them for the occasional purchase to keep them active.
Focusing on these three easy steps, you are taking the most effective action to raise your credit score. This preparation will set you up for success and help you get the best mortgage terms possible.