Credit scores are important when it comes to mortgage financing. Your credit score can affect your interest rate, the type of mortgage you qualify for and possibly even if you will qualify. Raising your credit score may also reduce your auto insurance premiums and possibly help you if you are looking for a new job.
So what's the best way to increase your credit score? First you need to review your credit report and see what is on there. One of the easiest ways for most consumers to get a credit report is to go to www.annualcreditreport.com. This site will allow you to access all three credit bureaus (Experian, Trans Union and Equifax). You can pull one or all three bureaus at one time. This website allows you to access your credit report for free once a year. If I am working with a client to improve their credit score, we may just pull one bureau and then 30-60 days later, pull another bureau. That way we can see if anything has changed in that time period. The credit report also does not show as an inquiry on your credit so it will not affect your credit score.
What to look for? The first thing to do is look over the report and see if there is any inaccurate information on it. If there are errors, you will want to notify the credit bureaus to get that information corrected.
Make sure all your payments are on time. Your payment history makes up about 35% of your credit score, so making sure you pay your bills on time is very important. Twelve months of on time payments makes a huge difference in your score.
If you have a late payment, you may want to ask the creditor if they will help you out and remove it. They don't have to, but sometimes a creditor will make an adjustment if you have had a good history with them. If you have collections, you will want to pay them. Any collections within the last 24 months are the important ones to pay soon. Your score is based on recent information and if you pay an older collection off, it will report as new information and will usually drop your score for a bit. Sometimes you can get a creditor to settle for less than owed and get them to remove the tradeline totally – that will help you.
Try to improve your "debt utilization". This number makes up about 30% of your score so it's important to keep your revolving debt at about 25-30% of the available credit. Lenders like to see that you are not maxing out your credit cards. This can be one of the fastest ways to improve your score. If we are trying to quickly improve a credit score, we will try to pay down credit cards to increase that score.
People worry about credit inquiries, but new credit only makes up about 10% of the score. The type of credit is also about 10% of the score. Your length of credit history makes up about 15% of the score. It's important not to close older credit cards as this can also affect your credit score.
Making your payments on time and keeping your credit card balances low are the best way to keep your credit score higher. Checking your credit report every year helps to make sure there are not any mistakes on your report. These will help you keep a higher credit score and make it easier to finance a home when you are ready.