If there is one thing that can ruin your chances at getting approved for a mortgage, it is a poor credit score. Every program has different requirements regarding how low your credit score can go, but for the most part, lenders want to see a score that is at least within the “good range” of the credit score tier. This means a credit score no lower than 700. Because not everyone has a score that high, it pays to know how to increase your credit score to get as close as possible to this score in order to have the ability to obtain the best terms on a new mortgage.
Keep your Revolving Balances Low
One of the largest reasons credit scores decrease is because of the amount of outstanding revolving balances. Revolving balances are those that you carry on a credit card – these balances are risky to lenders because you are continually able to have access to the credit once you pay it off. The lower your utilization rate or the amount of debt you have outstanding compared to how much credit is available to you, the better your score will get. This shows that you have financial responsibility and only use your revolving balances to make a large purchase, but that you have the resources to pay it off right away. It is okay to have small balances – as much as 30 percent of the available balance that you have, but no more than that if you want to keep your credit score up.
Don’t Move your Balances Around
Many people think that if they refinance their existing debt into new debt that their credit score will increase. In reality, all that you are doing is moving debt around and new debt is often riskier than old debt because you are starting all over again. Rather than refinancing your old debt to make it look like you are paying it off, just pay it off. Even if you make small, consistent payments toward the debt, you will start taking chunks out of the debt, eventually lowering your utilization rate, which in turn increases your credit score.
Keep Unused Credit Cards Open
It might be tempting to close your unused credit cards in an attempt to increase your credit score, but sometimes this tactic can hurt you. Let’s take a look at an example:
- Joe has $5,000 in available credit, $3,000 of which is on unused credit cards. He has $1,500 outstanding. If he were to close the credit cards that held the unused $3,000 in available credit, his new utilization rate would be a whopping 75%! That is enough to seriously damage a credit report. On the other hand, if he kept those cards open, his utilization rate would be the desired 30%, keeping his score up.
Every situation will differ when it comes to determining which cards should remain open, but your utilization rate should be the deciding factor.
Don’t Apply for New Credit
If you know that you want to apply for a mortgage in the near future, avoid applying for new credit, including credit cards. Every time you apply for new credit, an inquiry shows up on your credit report. This inquiry might not hurt your credit score a lot, but they can add up, especially if you have a lot of them. Typically, you should avoid taking out any new credit months before you apply for a mortgage so that you can minimize the hit that the inquiries take to your score, not to mention the fact that new credit will make a mortgage lender suspicious.
These top tips will help your credit score stay as high as possible, but they need to be utilized in addition to the fact that you make your payments on time. Nothing can replace the need to make your payments on time. Even if you follow each of the above tips, if you have a large number of late payments on your credit report, your credit score will not be able to increase.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.
