Tips to Improve Your Credit Score Before Buying a House

Buying a home is a big investment, and it often depends on your credit score. However, if you are hoping to buy a home, you may be wondering what your options are if your credit score is less than optimal.  

Your credit score can be the difference between getting approved for a mortgage, or not. And if you do get approved for a mortgage with poor credit, you may end up with a higher interest rate than someone with good credit. This can mean that you end up paying thousands of dollars more over the life of your mortgage.  

The good news is that there are steps you can take to improve your credit before buying a home. Here are some tips that could help.  

1. Understand Your Credit Score   The first step in improving your credit score is to understand what it is. Your credit score is a number between 300 and 850 which represents your creditworthiness. The higher your score, the more likely you are to be approved for a loan, and the lower your interest rate will be.   There are three major credit reporting agencies: Equifax, Experian, and TransUnion. Each of these agencies will have slightly different information about your credit history, so it is important to check your credit report from each agency regularly.  

2. Check Your Credit Report   Your credit report is a record of your credit history. It lists all your credit accounts, including loans, credit cards, and mortgages, as well as your payment history, balances, and credit limits.   Checking your credit report regularly is important, as it can help you identify errors that may be negatively affecting your credit score. If you find errors, you can dispute them with the credit reporting agency to have them corrected.   I recommend to my clients to check their credit at www.annualcreditreport.com It is the only source for your credit reports as free that is authorized by law and it’s safe.  

3. Pay Your Bills on Time   A history of late payments can have a negative impact on your credit score, so it is important to make sure you pay your bills on time. Set up automatic payments or reminders to help ensure you do not miss any payments.   If you do have a history of late payments on your credit report, the best thing you can do is to start making payments on time consistently. Over time, your history of on-time payments will help improve your credit score.  

4. Pay Off Outstanding Debt   Outstanding debt, especially high-interest credit card debt, can be a major factor in a low credit score. If you have outstanding debt, focus on paying it off as quickly as possible, starting with the debt with the highest interest rate.   Paying off your debt can also have the added benefit of improving your debt-to-income ratio, which is an important factor mortgage lenders consider when deciding whether to approve you for a loan.  

5. Avoid Closing Credit Card Accounts   Many people think that closing credit card accounts they no longer use will help improve their credit score, but that is not always the case. Closing a credit card account can increase your credit utilization rate, which is the ratio of your credit card balances to your credit limits.   Instead of closing unused credit card accounts, consider keeping them open and using them occasionally for small purchases. This can help show that you have a history of responsible credit use.  

6. Limit New Credit Applications   Applying for new credit can also have a negative impact on your credit score. Each time you apply for credit, the lender will perform a hard inquiry on your credit report. These inquiries can stay on your credit report for up to two years, and too many of them can negatively affect your credit score.   To avoid unnecessary hard inquiries, limit the number of new credit applications you submit. If you are shopping for a mortgage, try to keep all mortgage applications within a 30-day period. This is because multiple inquiries for the same type of credit, within a short period of time, are often considered as a single inquiry and have little negative impact on the credit score.  

7. Keep Your Credit Balances Low   High credit card balances can negatively affect your credit score, even if you make your payments on time. In general, it is best to use no more than 30% of your available credit limit.   If you have high credit card balances, focus on paying them down as quickly as possible. This will not only help improve your credit score but will also save you money on interest charges.  

8. Build Up Your Savings   Having a healthy savings account can help demonstrate to lenders that you are financially responsible and able to handle unexpected expenses, as well as contribute to a more stable financial future when you eventually own a home. Additionally, having a substantial down payment when buying a home, reduces the monthly mortgage payments and overall mortgage interest.  

9. Seek Professional Help   If you are struggling to improve your credit score, do not be afraid to seek professional help. A reputable credit counselor or financial advisor can help you develop a plan to get your finances under control and improve your credit score.  

In addition, some lenders offer programs that help people with poor credit improve their credit scores so they can qualify for a mortgage. Make sure to ask your lender about any programs they offer.  

Final thoughts   Improving your credit score before buying a home is an important step to take. Not only will it increase your chances of getting approved for a mortgage, but it can also help you secure a lower interest rate and save you thousands of dollars over the life of your mortgage. So, start taking steps to improve your credit score today and work towards your dream of owning a home.