How to Increase Your Credit Score and Why It May Get You a Better Mortgage!

Let’s Dive In!

We'll begin by exploring strategies to significantly boost your score in a short amount of time. After that, we'll discuss the advantages of having a higher score when purchasing or refinancing your home.

Make On-Time Payments

Why it matters: Payment history is the most significant factor in your credit score, accounting for 35% of your FICO score. Late payments can stay on your credit report for up to seven years, so it's crucial to pay all your bills on time.

How to do it: Set up automatic payments through your bank or use calendar reminders to ensure you never miss a due date. If you have trouble remembering, consider using apps like Mint or Prism to track your bills and payments.

Reduce Your Credit Card Balances

Why it matters: Your credit utilization ratio, which is the amount of credit you're using compared to your total credit limit, makes up 30% of your FICO score. High balances can indicate financial stress and lower your score.

How to do it: Aim to keep your credit utilization below 30%, and ideally below 10% for the best scores. Pay off high-interest debt first, and consider making multiple payments throughout the month to keep your balance low. You can also request a credit limit increase, but be cautious not to increase your spending.

Avoid Opening New Credit Accounts

Why it matters: Each new credit inquiry can lower your score slightly, and opening new accounts can reduce the average age of your credit history, which makes up 15% of your FICO score.

How to do it: Only apply for new credit when necessary. If you're shopping for a mortgage, try to keep all inquiries within a short period (typically 14-45 days) to minimize the impact on your score.

Check Your Credit Report for Errors

Why it matters: Errors on your credit report can negatively impact your score. Regularly reviewing your report helps you catch and dispute inaccuracies, which can improve your score.

How to do it: Obtain free copies of your credit report from the three major credit bureaus (Experian, TransUnion, and Equifax) at AnnualCreditReport.com. Look for errors such as incorrect personal information, accounts that don't belong to you, or incorrect payment statuses. Dispute any errors you find with the credit bureau.

Become an Authorized User

Why it matters: Being added as an authorized user on someone else's credit card can help you build credit, especially if the primary user has a good credit history. This can positively impact your credit score without you having to use the card.

How to do it: Ask a family member or friend with a strong credit history to add you as an authorized user on their account. Ensure that the credit card issuer reports authorized user activity to the credit bureaus.

Benefits of a High Credit Score When Buying a Home

Lower Interest Rates

Why it matters: A higher credit score can qualify you for lower mortgage rates, which means lower monthly payments and significant savings over the life of your loan.

Example: On a $250,000 loan, even a 0.5% lower interest rate can save you thousands of dollars in interest. For instance, a 30-year fixed-rate mortgage at 3.5% interest would cost you about $154,140 in interest, while the same loan at 4% interest would cost about $179,674 in interest, a difference of over $25,000.

Better Loan Terms

Why it matters: Lenders are more likely to offer favorable terms, such as lower down payments and reduced fees, to borrowers with higher credit scores.

Example: You might qualify for a conventional loan with a lower down payment requirement if your credit score is high. For example, a borrower with a high credit score might only need to put down 5% of the home's purchase price, compared to 10% or more for someone with a lower score.

Increased Negotiating Power

Why it matters: A strong credit score gives you more leverage when negotiating with lenders. You can shop around for the best rates and terms.

Example: With a high credit score, you can approach multiple lenders and use competing offers to negotiate better terms. This can include lower interest rates, reduced closing costs, or more flexible repayment options.

Access to More Loan Options

Why it matters: A higher credit score opens up a wider range of loan products, including those with more favorable terms and conditions.

Example: With a high credit score, you might qualify for loans that offer lower interest rates, longer repayment terms, or special features like interest-only payments or adjustable-rate mortgages (ARMs). This flexibility can help you find a loan that best fits your financial situation and goals.

Lower Private Mortgage Insurance (PMI) Costs

Why it matters: If your down payment is less than 20% of the home's purchase price, you may be required to pay PMI. A higher credit score can reduce the cost of PMI.

Example: Borrowers with higher credit scores often pay lower PMI premiums. For instance, on a $200,000 loan, a borrower with a credit score of 760 might pay around $50 per month for PMI, while a borrower with a score of 680 might pay closer to $100 per month. Over time, this can add up to significant savings.

Faster Loan Approval Process

Why it matters: Lenders view borrowers with higher credit scores as lower risk, which can streamline the loan approval process.

Example: With a high credit score, you may experience quicker approval times and less stringent documentation requirements. This can be particularly beneficial in competitive housing markets where timing is crucial.

Potential for Lower Homeowners Insurance Premiums

Why it matters: Some insurance companies consider your credit score when determining your homeowners insurance premiums. A higher credit score can lead to lower premiums.

Example: If you have a high credit score, you might qualify for discounts on your homeowners insurance, potentially saving you hundreds of dollars annually.

Improved Financial Stability

Why it matters: Working to improve your credit score often involves developing better financial habits, which can lead to overall improved financial stability.

Example: By paying bills on time, reducing debt, and managing credit responsibly, you not only boost your credit score but also build a stronger financial foundation. This can help you handle unexpected expenses and achieve other financial goals more easily.

A higher credit score offers numerous benefits when purchasing a home, from lower interest rates and better loan terms to reduced insurance costs and faster loan approvals. By taking steps to improve your credit score, you can enhance your financial stability and make homeownership more affordable and attainable.

Have you started working on your credit score yet? If you have any questions or need more tips, feel free to ask!