Unless you’re lucky enough to have a few hundred grand sitting in your bank account, you’re probably going to have to take out a mortgage when you’re ready to buy a new home. One of the things lenders look at when determining the interest rate for your mortgage is your credit score.
Your credit score is a number that lenders use to judge how likely you are to repay debt. Having a good credit score might snag you a better rate for your mortgage. Here’s the breakdown of what goes into calculating your credit score and how you can improve it.
Credit payment history
Your credit payment history is one of the most important factors when determining your credit score. It’s based on whether you make payments towards your credit on time.
By paying your bills on time, you’ll be able to see improvement with your credit score. In fact, it can help improve your credit score within 1 to 2 months.
Debt-to-credit utilization divides the balance of your credit accounts by your credit limit on the accounts. This comparison is another important factor in measuring your credit score, because it gives information as to how much of your expenses are going towards paying down existing debt.
The more available credit you have, the better your score will be. Paying down your debt is the fastest way to improve your credit score. By using less than 30% of your available credit, you could see improvement in as little as 1 month.
Length of Credit History
How long you’ve held a credit account also affects your score. In theory, the longer you’ve had an account, the more experience you’ve had using credit, making you more credible to lenders.
It takes at least 6 months of credit history to affect your score. So, while this can help improve your score, it may take longer to see the results.
How many credit accounts you have also plays a part in determining your score. That can be credit like credit cards, store credit cards, car or school loans.
While opening new accounts can increase your debt-to-credit utilization, they also decrease the average length of your credit history. So you shouldn’t open a new account just for the sake of improving your credit mix. Instead, look at the credit accounts you already have and make sure you’re making timely payments.
Errors on your credit report can occur, so make sure to review your credit report before applying for a mortgage. If you do find a mistake, you can contact the credit bureau and have it fixed within 1 to 2 months. If it’s an error on your credit card account, you’ll need to contact your credit card company as well as the credit bureaus. This can take up to 3 months.
When it comes down to it, your credit score plays an important role in determining what mortgage lenders will offer you. While it may take time to improve, it’s worth working on your score now to get a better interest rate in the future.