Blog posted On June 05, 2019
Your credit score is influenced by five differently-weighted components including payment history (35%), total amount owed (30%), credit history (15%), credit mix (10%), and new credit (10%). Banks and lenders use your credit score to determine whether or not you are a good candidate for a loan or a line of credit. Even if you are not planning to buy or refinance a home this year, it’s good to practice to build positive credit habits to maintain a positive score. Most financial experts recommend taking six months to a year to improve your credit before you apply for a mortgage loan.
Here are three easy ways to improve your credit score, without making drastic changes.
Limit Credit Utilization
Most consumers carry debt whether it’s through a mortgage loan, car loan, student loan, or monthly credit card debt. Your total debt is the second most influential credit score component, making up 30% of your credit score. Your credit utilization is the ratio between your credit allowance and how much credit you are using. For example, if your credit card has a limit of $10,000 and you have a balance of $1,000, your credit utilization ratio is 10%. Keeping your ratio under 10% is best, but if that’s not possible, most financial experts agree a good ratio is less than 30%. To manage your credit utilization, be aware of your total balances on all accounts. If you have to make large purchases using a credit card, spread them out. Most importantly, if you are applying for a loan or line of credit, do not apply for multiple loans or lines of credit at the same time. Your new car can wait until you’ve financed the new garage to park it in.
Take Out Different Kinds of Loans
A diverse credit mix is another way to build your credit score, but this does not mean opening up a credit card at all of your favorite stores. If you only have one or two lines of credit, like a student loan and a car loan, credit reporting bureaus do not have a lot of information to compile your credit score. If you are a recent college graduate with limited credit history, consider applying for a credit card. Keeping a mix of credit and responsibly paying off your debts shows banks and lenders that you are able to manage your credit, and over time, will improve your credit score.
Monitor Your Credit Report
Did you know you are eligible for a free credit report from all three credit reporting bureaus each year? You can order online at www.annualcreditreport.com, the only authorized website for free credit reports, or call 1-877-322-8228. Credit reporting bureaus make mistakes, and it can take years for these mistakes to fall off your credit report. Be diligent and monitor your report. If you do find a mistake, contact the credit reporting bureau and provide the documentation needed to get it corrected. Catching a mistake now gives you more time to repair your score before you need to apply for a loan.
Your credit score shows lenders and banks you are a good candidate for a loan and will be able to pay it back. A good credit score may even help you earn a more competitive interest rate. There are numerous free online resources to help you check your credit score, but the FICO® Score is the only score accepted by most lenders and banks. If you have questions about your credit before financing a new home purchase or applying for a mortgage refinance, please let me know.