If you are looking to buy a home, one of the biggest indicators of how much you will end up paying is your credit score. Whether you are thinking about financing a house or financing a car through a loan, your credit score will determine how much interest is added to your loan and will ultimately influence how much you pay per month.
In this blog update we will offer several credit score tips to help you get your score ready to go for a home loan. We will mostly be talking about credit cards in part 1 of this series. In the second part of this series, we will also explain why mortgage lenders look for specific items in your credit history to determine how risky of a borrower you will be.
Keep in mind that while this blog will be specifically regarding mortgage lenders, this can also be used for auto loans and other loan types that have an interest rate as well.
Do You Have No Credit? Get A Secured Credit Card
If you are starting from a point of having no credit history at all, a secured credit card is the way to go. A secured credit card is very similar to a regular credit card, except you must deposit a specified amount as collateral before receiving a credit limit. More often than not, the amount that you deposit will be your credit card limit as well. Most credit card issuers will also have a secured credit card, so be sure to shop around for whatever card gives you the best terms.
A secured credit card is a perfect way to start learning good credit practices as well as a perfect way to help with repairing your credit. Additionally, because you make a deposit as collateral, if you close your account by your own choice with no money owed to the lender, that money will come back to you. However, we do not recommend closing any credit accounts completely unless it is completely necessary. The length of your credit history is one of the factors that determines your credit health, and a longer credit history is better.
- 1 Minute | No Hard Credit Check
Keep Your Credit Card Balances Low
The best way to improve your credit score is to keep your revolving credit balances low. Credit utilization ratios can impact your credit score by as much as 45% according to FICO scoring models. The magic percentage number that you want to keep your utilization below is 30%.
However, this does not mean you should use all of your credit cards up to that 30% point. It’s best to keep your balances at 1% utilization, so credit card companies are able to report card usage to the credit bureaus and also report the fact you’re paying these amounts off. While doing this for a short time will show some improvements to your credit score, in the long term your credit score will definitely be in a very good position.
We recommend using your credit cards because lenders like to see that you are utilizing the credit they give you and are also being responsible enough to pay your bills on time. Being on top of this will keep you in a favorable position with your credit lender.
Credit Limit Increases Helps Utilization Ratios
Just like how keeping your balances low helps with credit utilization, increasing your credit limit also helps! For example, if you originally opened a credit card with a balance of $1000 and spent $500, that would put your credit utilization at 50%, which is well over the magic percent of 30%.
Let’s say you are able to request a credit limit increase and are approved. Your credit card lender has now approved a new credit limit of $5,000 due to you keeping your balances low and paying your bills on time. Now your credit utilization rate is at 10%, well below the 30% threshold! Now make sure you pay down that $550 to as close to 0 as possible!
When companies look at your credit profile before approving your credit application, they will see how much your overall credit limit is and compare that to how much you have actually spent so far. There are credit card companies that are very favorable towards rewarding customers with credit limit increases as long as they stay on top of their credit utilization and pay on time.
We recommend doing some research to see which companies allow for credit limit increases within 90 days. Also remember that when they do check to see if you are eligible for a credit limit increase, this is only a soft pull and will not affect your current credit score at all!
Read on to part 2 for more information on what mortgage lenders look for and how to further protect your credit score!
- 1 Minute | No Hard Credit Check
