6 Tips to Build Your Credit Score for Homebuying
Monitoring your credit is important all the time, but especially when you’re exploring — or in the middle of — the homebuying process. That means that in addition to getting your finances and paperwork in order, you’ve got to check your score and work to maximize it. Here are a few easy, low-cost ways of doing this so your housing dreams don’t get derailed.
1. Review and Monitor Your Credit Report
The first step in understanding your credit score is to access your credit score. There are numerous free options out there such as Mint, Credit Karma, and FreeCreditReport.com. Many credit card issuers also offer free credit monitoring services.
It is important to note that the credit score used by your mortgage lender might be slightly different from the score you access through free credit monitoring software. That is because there can be different calculations used depending on the credit bureau and type of financing you are inquiring about (auto/mortgage/credit card). However, having an idea of your score along with the breakdown of accounts can help you understand your overall credit profile.
BONUS TIP We advise that you check your score at least once per month to ensure there is no fraudulent or unwanted activity and sign up for credit monitoring.
2. Pay Your Bills on Time
It may sound obvious, but one of the most important factors to keep your credit score high is to pay your bills on time. For example, 35% of your FICO calculation is based on your payment history. Just one missed payment could tank your score up to 100 points!
Keep in mind that many missed payments are not due to lack of funds but from forgetting to pay or an autopayment not going through. Remember to update any auto payments if you decide to switch banks or have any other changes to your financial profile.
BONUS TIP To maximize your credit score, pay your credit card before the last day of your billing cycle, not just when your bill is due. This improves your score because your balance is reported to the credit bureaus at the end of your billing cycle as $0, which improves your utilization ratio.
3. Watch Your Credit Utilization
“Credit utilization” is the amount you owe on all your credit cards divided by your combined credit limit. For example, if you have 3 credit cards with a total balance of $5,000 with a total combined credit limit of $50,000, your credit utilization is 10%.
Having a credit utilization over 50% will lower your credit score considerably. A good personal goal would be to keep utilization under 30%, but you can optimize your credit score if you keep your utilization under 10%.
QUICK TIP Credit utilization guide:
over 50% = Will lower your score significantly less than 30% = On the right track less than 10% = Optimal
4. Limit Hard Inquiries
There are two different types of inquiries that can affect your credit score. A soft inquiry is when someone checks your credit without accessing your entire report. This does not affect your credit score. A hard inquiry is when a lender or card issuer runs your credit report when you apply for a loan or credit account. This will report on your credit and could lower your score if you have too many hard inquiries in a short amount of time.
A bonus of working with our team is that can apply and get preapproved with just a soft credit pull. That means we can do a personal consultation and build your homebuying game plan for free and without a hard inquiry on your credit.
BONUS TIP Hard inquiries done within a 30-day window for the same purpose all count as one hard inquiry on your credit. This allows you to shop lenders when you apply for auto or home financing.
5. Be Careful Closing Old Accounts
If you close an old credit card account you no longer use, this account could be wiped from your credit score completely. Sometimes it might be better to keep old credit accounts open versus closing them. This might sound counterintuitive so let’s explain how it works.
The credit bureaus develop your credit score based on your credit lines, payment history, length of credit, and credit utilization. Say you only have 2 credit cards: a Citi card with a $2,500 limit that is 10 years old and a Chase card with a $5,000 limit that is 1 year old. You currently owe $1,000 on the Chase card. Neither card has an annual fee. If you keep both accounts open, you have 10 years of good credit history with 13% utilization. If you closed the Citi card because it’s an old account you don’t use anymore, you would now have 1 year of good credit history with a 20% utilization. The action of closing the old Citi account could lower your score significantly.
Factors in deciding to keep an account open or closed include the age of your credit accounts, the number of accounts you have open, the utilization ratio, and any annual fees associated with open accounts.
BONUS TIP While closing an account could wipe good history from your credit report, closing an account will not automatically remove any negative marks from your credit.
6. Resolve Any Delinquent Accounts and Collections
If you’ve found yourself in a situation where you have a missed payment or an account in collections, it might take some work to resolve the situation. Simply paying off the debt or closing the account might not remove the negative mark from your score. You may have to reach out to the creditor, collection agency, or credit bureau to get the mark removed from your credit profile once it has been resolved.
Our team does offer free personal consultations, which includes a credit profile and assessment for you. We can help determine specific ways to raise your score and give you a timeline to reach your credit score goal. This can be immensely beneficial if you are looking to buy within the next 12 months.
QUICK TIP Simply paying off a collection might not remove the negative mark on your credit report. Be sure to double-check your credit report and ensure the mark is removed after the collection is resolved.