Don’t Forget About Your Credit Score – Ways to Improve It
Right now many of us feel a certain lack of control with what is going on in our communities due to COVID-19. And those of you thinking of buying a home in the coming year may feel that way even more so.
One thing potential buyers can focus on and have some control over can be their credit score.
Working on your score is more important than ever since lenders have imposed stricter requirements and are expecting higher FICO scores. And these expectations by lenders will most likely continue in the months ahead — when you may be ready to actively search for a home and mortgage.
What to Expect Now
It’s never too late to begin practicing good credit habits. Even though some of you may be facing some financial uncertainty, knowing the steps you can take to improve your credit score and work on it will be beneficial during this time.
The better your score, the more willing lenders will want to work with you since you’re viewed as less risky. And that means they will offer you a better interest rate and more loan options to choose from.
Remember that your credit score is just one part of your financial picture that a lender will use to determine your ability to pay back your mortgage. However, it’s a huge part of their review of your loan application.
Right now lenders are looking at score in the higher 700s for most loan products. Some government loans, such as FHA loans, will consider lower scores. Don’t hesitate to reach out to us and we can go over what lenders are looking for in terms of scores and other qualifications during this time of COVID-19 and afterward.
Below is some helpful information to keep in mind and, most importantly, ways to improve your score.
Credit Score 101
Your FICO credit score helps lenders predict your potential credit success or failure with them. Your score tells lenders how you’ve handled your credit card payments and other loan payments, like your car or student loan.
It’s not based on your income, length of employment, or assets but on your creditworthiness. So a higher income doesn’t necessarily mean a higher credit score. It’s how you have managed credit.
Know Your Score
You should start to monitor your credit score from all three bureaus about 3-6 months BEFORE you even start looking for a home. The earlier you start, the more time you can repair any credit issues if there are any.
It’s easy to track your credit score. You can sign up online for myfico.com or other credit monitoring companies. You’re also entitled to one free copy of your credit report from each of the three credit bureaus every 12 months. You can get it through AnnualCreditReport.com. Most experts say to stagger these reports so that you get one every 4 months.
Always check for errors on your report. An error could negatively affect your credit score, and ultimately, your mortgage rate.
How to Improve Your Score
No matter your score, it’s good to use the strategies below. That way you can either improve it or keep it in a higher range so you can qualify for a lower interest rate and better loan products.
Make smart decisions now when it comes to your credit card purchases and your own financial situation. It takes work but if you make a plan and are consistent, your score will start to increase. Then you’ll be all set to meet with a lender when you’re ready.
Don’t close credit cards that have a positive payment history. It’s good if you’ve had a credit card a long time since the length of your credit history totals around 15% of your credit score.
Pay your credit cards on time since your payment history accounts for 35% of your score. One late payment can affect your score for a year; many late payments for a few years. Make sure you set up a system of paying your bills that works for you.
Don’t misplace bills or notices. Credit card companies usually wait to report your late payment to credit bureaus until about 30 days have passed the due date or once you’ve missed two due dates. If you miss a payment, call your credit card company immediately since they may agree to withhold reporting it if you have been a good customer so far.
Pay more than the minimum on your cards to keep balances low. The higher your credit card balances the lower your score. Lenders care about how much you owe on your most recent statement. Make it a habit to keep expenses low and aim to pay back your balances in full if you can. But still use your credit card now so that you are demonstrating you can handle credit responsibly!
Don’t max out your cards and use your entire line of credit. Keep balances below 10% or 20% of the total credit line so that your ratio of debt-to-available-credit is good. Remember that 30% of your credit score is determined by how much you owe on each account and how much of your credit limit has been used. Say yes if your account offers a higher amount of available credit, but don’t use it. Remember, higher available credit and lower balances means a better debt-to-available-credit ratio.
Cut back on your credit card use for two or three months before your plan to apply for a loan or mortgage. This will help you get those balances lower and improve your debt-to-available-credit ratio.
Keep it simple and deal with a limited number of cards on a regular basis. You want “older” cards in your wallet. How long you have owned your cards highlights the length of your payment history and influences the average account age on your credit report. The longer you’ve own it means you’re a dependable and stable borrower.
Don’t open new credit cards or apply for other loans if you plan to apply for a mortgage in the next few months. Each time a business checks your credit report for a loan application that can negatively affect your score. Don’t go buying a car or start purchasing large items when you get closer to looking for a mortgage. New accounts and queries account for 10% of your score.
However, YOU can still check your credit report as many times as you like and it won’t affect your credit score at all. Shopping around for a mortgage (or car loan) won’t lower your score as long as inquiries into your credit report are made within 30 to 45 days of each other. This way it will be counted as a “single request.”
Pay off your parking/speeding tickets and even library fines. You don’t want these “trivial” fines to be turned over to a collections agency. These little slip-ups could do damage to your score.
Think carefully before pursuing credit counseling. When you seek out consumer credit counseling to improve your score, that information is put on your credit report. It may not lower your score but lenders don’t always look at counseling as a positive. This view from lenders may be different now in the time of COVID-19 though. However, if you need help then change your timeframe for buying a home and work with a counselor to help get your finances and debt on the right track. Then you will be in a better position to get approved by a lender.
Don’t ever feel like you can’t improve your score. Negative information on your credit report can be erased over time. It can take some work but you can improve your credit score once you start to implement these strategies.
Use Your Time Wisely
If you’ve put your buying goals on pause right now, you can still use this time wisely when it comes to your credit score. Now is the time to set your sights on working toward you goal of homeownership.
We’ve always recommended that our clients start to monitor their credit score and credit report as soon as they even think they want to be a homeowner. But first and foremost, start developing good credit habits today.