If you’re considering purchasing or refinancing a home, it’s a good idea to look at your credit score first. Your credit score will directly impact your interest rate, and the loan programs that you qualify for. When it comes to a home loan, improving your score can save you money and give you a larger variety of options. The higher your score, the more you can save. Here are some tips to boost those numbers in 2020!
- Avoid Late Payments. Paying bills on time is the single most important factor in your credit score. If you have a late payment on your report that you believe is in error – you can contact the credit bureaus to dispute it and have your score corrected.
- Decrease Your Overall Credit Utilization. Credit bureaus calculate your overall credit limit versus how much credit you’re currently using, and it’s best to have a ratio below 30%. One quick way to decrease your utilization is to call your credit card issuers and request a higher limit on your existing cards. This higher limit will lower your ratio without adding any hard inquiries to your report. Paying down your existing balances will also reduce your ratio.
- Limit New Accounts. Hard Inquiries show up on your report whenever you apply for new credit. Too many hard inquiries can lower your score, but their impact does fade over time. Be cautious of opening too many new accounts at once and try to avoid hard inquiries 6-12 months before applying for a mortgage loan. Opening new accounts can also reduce your average length of credit, which can further impact your score.
- Don’t Close Inactive Accounts. Surprisingly, closing old credit accounts will directly affect your credit score. This is because closing old accounts can shorten your length of credit and raise your credit utilization. If you do have credit cards you no longer use, you are better off holding on to them or renegotiating for a better interest rate to start using them again. If you feel you still want to close some accounts, wait it out until after the home buying process, as it may deduct points each time you close an account.
- Dispute Errors. Review your credit report regularly and dispute any errors that might be bringing down your score. Simply send a letter directly to the credit bureau with your explanation of what the errors were. The credit bureau will review your case and respond back in around 30 days. If it is found to be an error, it should be removed directly from your credit report. According to the Federal Trade Commission, as of 2012, 5% of consumers had errors on their credit reports which could have resulted in less favorable terms for loans.
Let’s wrap up with a few fun credit score facts:
Credit scores range from 300 – 850
Any score over 810 is considered “perfect”, because raising your score beyond that point doesn’t offer any real increase in benefits from creditors.
The average 2019 FICO credit score was 706, and the average 2019 Vantage score was 682!