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From applying to a job to getting a mortgage, your credit score is a key indicator of your overall financial health, one that most institutions will leverage to determine whether you pose a risk to their bottom line. When applying for a mortgage, reviewing your credit is the first thing a mortgage lender do.
A higher credit score puts you in good financial standing and can earn you lower interest rates when borrowing. It takes time, patience, and effort, but if you’d like to improve your credit, this post will walk you through the steps to get — and maintain — a higher credit score.
Know what works and doesn’t work for you. You can view your credit reports from the two major national credit bureaus: Equifax, and TransUnion. You are allowed to check these reports free of charge once per year to review your score.
There are also free apps, such as Credit Karma, that can help you monitor your credit score (this is referred to as a “soft” inquiry). These apps will also identify any missed payments or other alerts that could have a negative impact. Your payment history is the most important factor to impact your score, and there are many ways to improve your payment history, including:
Credit is money you haven’t earned. As such, it’s important not to go over your limit; going into overdraft can have a negative impact on your credit score. As a rule of thumb, the higher your credit limit, the less you should use. Try to use less than 35% of all your available credit (this includes all cards and lines of credit), otherwise a lender could view you as a potential risk. Some financial advisors even suggest using 30% or less.
For example, if you have a line of credit with an $8,000 limit and a credit card with a $3,000 limit, your total available credit is $11,000 and you should look to use $3,850 (or less) at a time.
Payment history has the biggest impact on your credit score. Most lenders use your FICO credit score to assess if you’re a financial risk. Paying off your bills and your debts on time will continue to work in your favour. Avoid late payments by keeping track of your monthly expenses, setting alerts for upcoming due dates, and automating bill payments through your financial institution.
The longer your credit accounts are open and in use, the more your score will improve. Keep in mind that transferring an old account to a new one — with a balance transfer, for example — is considered new credit.
Even if you’re not using it, consider keeping an old account open, but make sure there are no fees associated with non-usage.
If you find yourself drowning in student loans or other types of debt, you might consider taking out a debt consolidation loan from a financial institution to pay them off in one lump sum. Then you have one single payment rather than several, and some banks offer lower interest rates, which means you can pay off the loan faster. Consolidation loans can help your credit score and get you debt-free in a shorter period.
There are two main types of inquiries when it comes to checking your credit history. An example of a “soft” inquiry might include allowing a potential employer to check your credit history, or a credit card company checking your score to preapprove a new credit offer. Soft inquiries do not affect your credit score.
On the other hand, “hard” inquiries do affect your credit rating and can impact your score for up to two years. Hard inquiries include new credit card applications, auto loans or mortgages.
Although it’s fine to apply for credit from time to time, too many hard inquiries over a short time span can adversely affect your credit score. They could signal to lenders that you are a financial risk by trying to live outside of your means. It’s best to apply for credit only when you need it, or when you can combine inquiries as a single check to keep your credit score pristine.
People with only one credit product, such as a credit card, may have lower scores than those who differentiate their portfolio with products such as car loans, lines of credit and credit cards. As always, it’s important to pay back any monies borrowed to keep your score in good standing.
Having a low credit score can be financially crippling, burdensome, and prevent you from making purchases that could otherwise improve your life, such as a new home. It can take weeks, months or even a few years to see a notable difference in your credit score, but once you start taking the steps to improve, the benefits will be well worth it.
For help in understanding how your FICO score affect your mortgage please contact a Sunlite Mortgage Agent.
