If you’re planning on buying a home or looking to refinance your current home, you’re certainly aware that you will have to deal with a mortgage. To obtain a mortgage, you need a solid credit score, and you might be wondering if your score makes the grade — or if it doesn’t, what you can do about it.
Rising interest rates and the harsh reality of high student loan debt have led to more anxiety for many regarding maintaining a good enough credit score. Millennials, for instance, are more likely to be facing higher debt than previous generations and their credit scores may be more adversely affected as a result. In a study by The Urban Institute, millennials’ median credit score lies at 640, slightly behind Gen Xers at 680 and close to 90 points behind the median of the baby boomer generation (728). Millennials may also find themselves in living situations that prevent them from saving heavily to invest in a home down payment.
For those with lower credit scores, adjustable-rate mortgages can be a path to home ownership, but more than 10 years after the housing crisis, many homebuyers still remain reluctant to take one on.
However, you can work to boost your credit score and get the kind of mortgage you want. Here are eight actions you can take to help raise your credit score:
1. Check Your Credit Report
Taking a look at your credit report can provide you with valuable information to craft your approach to boosting your score. The information found in your credit report is something that the banks will look at for any loan application you make, in particular your median score from the three main credit-reporting companies, Equifax, TransUnion and Experian. You can obtain a free report from all three annually through AnnualCreditReport.com.
2. Figure Out Your FICO Score
Your FICO score is as a measure of consumer credit risk used by lenders to determine whether you are eligible for a good interest rate on a loan. The higher your score, the better the rate, so if your score is 720 or higher, you’ll have more flexibility in choosing a loan. Experian and TransUnion offer detailed analysis with their scores, and the former provides its information as part of a three-in-one report or through VantageScore’s consumer credit report.
3. Don’t Take Too Long Shopping for the Best Rate
As much as homeowners aim to be cautious in order to find the best rate, it’s wise not to make the process too lengthy. Why? Multiple inquiries for your credit report in a short period by lenders can potentially affect your FICO score. This comes more into play with lenders using VantageScore’s criteria or with lenders who rely on older algorithms for the FICO score that put mortgage applications as separate inquiries if they’re not two weeks apart. To avoid this situation, keep your loan search brief with a distinct focus on what you want or aim to be preapproved for a loan.
4. Stay On Target With All Payments
A surefire way to maintain a good credit score is to pay your bills on time. A positive payment history factors into your FICO score up to 35 percent. With credit cards, it’s also a good idea to pay off a large chunk of your outstanding balances to minimize your credit utilization ratio. That data contributes to 30 percent of your FICO score and boosts your overall credit score in the end. If you happen to have a recent late payment, delay your mortgage application so it can show up as an older delinquency that lenders may look on a bit more favorably.
5. Dispute Your Negative Credit Accounts
If you’re looking at your credit score and notice certain late payments and collection accounts that you feel shouldn’t be there, contact any of the three credit bureaus to petition for their removal. If you have substantiated proof to provide, they’ll remove it from your report and save you from having that misinformation lead to denial of your loan application.
6. Say No to New Debt
Mortgage lenders are going to scrutinize your financial movements, and if you apply for a car loan while trying to finance a house, it raises a red flag to them in terms of your stability. Inquiries regarding your credit such as a car loan are considered “hard” inquiries because your full credit report is pulled by a lender (with your permission), and a record of that is listed on your report. Hard inquiries can also affect your credit score (see No. 3). –“Soft” inquiries, on the other hand, include background check situations like obtaining a smartphone or receiving a prequalified credit card offer.
7. Keep Your Old Accounts
Most people tend to have one or two credit cards open that they never use. Don’t take this moment to close them, however. The average age of all of your accounts contributes a significant amount to your FICO score, so if they’re older it can actually help you out in the eyes of lending institutions.
8. Save With Purpose
Your savings are going to take a hit once your mortgage gets approved. This can lead some people to fall back on using credit as a way to get by. To avoid that situation, which can hurt your credit score, plan on reducing your fixed expenses and craft a strategy to save for six months’ worth of living expenses. Doing so can help you down the line if you’re going to apply for another loan.
Christopher Smith is a freelance writer when he’s not sampling the best cuisine in his hometown of New York City. Prior to that, he worked in film and television post-production, and counts the honor of working with Eartha Kitt among his milestones.