Your credit score has a huge impact on your life and plays a major role in whether or not you get a mortgage and what rate you’ll pay. That’s why it’s important to know how to improve your credit quickly.
The best way to start is by obtaining your free credit report.
1. Pay Down Your Debt
Lenders use credit scores, as well as other financial information like debt-to-income ratios and the length of your credit history, to determine your mortgage rates. While you can’t erase missed payments or collections accounts, you can quickly improve your score by paying down debt. For example, reducing balances on revolving accounts (credit cards) can boost your credit utilization percentage and potentially raise your credit score by up to 30 points.
Paying off old debts can also lower your credit utilization and, depending on the amount you owe, can significantly reduce your debt-to-income ratio. In addition, keeping credit account active adds to the length of your credit history and helps build your score. It is best to consult with a reverse mortgage specialist if you are interested in having this kind of mortgage in the present or the future.
In addition to paying down debt, making your bills on time is an essential factor in determining your credit score. Set up automatic payments or turn on reminders so you never miss a payment.
2. Pay Your Bills on Time
Paying your bills on time is one of the most important things you can do to improve your credit score. After all, payment history makes up 35% of your credit score. And that’s not just your credit card payments—it includes your utilities, student loan debt, and even medical bills.
In addition to making sure you don’t miss a payment that could hurt your credit score, paying your bills on time saves you money. Late fees and penalty APRs on credit cards can add up quickly, so it’s important to stay on top of your payments.
With the right system in place, it’s easy to make paying your bills on time a habit. Set up automatic payments and set reminders on your phone or computer to ensure you don’t forget your due dates. Also, make a point to write down the due date of your bills when you open them—circling or highlighting it will help you remember—and then put them on your calendar to avoid missing a payment. With a little bit of effort, you can turn paying your bills on time into an effortless task that’ll help you get a better mortgage rate.
3. Keep Your Credit Card Balances Low
Credit card balances are a major factor in your credit score, and keeping them low will help you boost your score. You want to use your cards but be sure you can afford the monthly payments, as late payments can damage your credit score. You can do this by setting up calendar alerts, using apps, or putting your bills on autopay to ensure you’re always paid on time.
Your credit utilization ratio, which measures how much you owe on your cards compared to your total available credit, accounts for 30 percent of your score. You should aim to keep this below 30 percent, but ideally lower.
One way to do this is to ask for a credit limit increase, says Tayne. That will reduce your overall credit utilization ratio, but you’ll need to pay off the new balance before the card issuer reports it at the end of each billing cycle. Another way to reduce your utilization rate is to make multiple payments during a billing cycle, which can help your credit utilization dip before it’s reported.
4. Avoid Opening New Credit Accounts
While opening new credit accounts may increase your available credit and lower your credit utilization ratio, doing so can also damage your credit score. When you apply for a new loan, including a mortgage, it triggers a hard inquiry on your report, which can temporarily lower your credit score. A lender can see the hard inquiries on your report, and multiple such requests within a short period can raise a red flag that you’re desperate for debt and potentially in financial trouble.
Additionally, when you open a new account, the average age of your credit drops. This can impact your credit score in a big way over time, especially if you’re applying for a mortgage soon.
If you’re considering opening a new account, it’s best to do so only after your credit has improved and you can afford the payments. Alternatively, you can request a credit limit increase on an existing account to reduce your utilization ratio. This also helps with credit mix, which makes up 10% of your FICO score.
5. Keep Your Old Accounts Open
Many people don’t have a perfect credit score, and if you’re looking to buy a home or refinance your mortgage, you’ll need to improve your credit before applying for a new loan. Luckily, there are several easy hacks you can use to boost your credit score quickly.
Credit bureaus weigh the average age of your credit history when calculating your score, so keeping old accounts open can help improve your score. In addition, closing a credit card can reduce the amount of available credit you have and hurt your credit utilization ratio, which makes up 30% of your credit score.
If you have an old account that you no longer use, consider requesting an increase in the credit limit on the card to keep it active. However, be sure to only spend within your budget, and make your monthly payments on time. Another way to keep an old credit card active is by using it to pay a monthly bill like your utilities, cell phone or internet service. These monthly payments can also be reported to the credit bureaus and boost your score.
6. Get a ‘Secured’ Credit Card That Reports Payments to the Credit Bureaus
When you have bad credit, the best way to improve it is to use a credit card that reports to the three major credit bureaus. Many people who have thin or no credit files can see their scores lift with a secured card within just six months. However, it is important to remember that relying solely on cash or prepaid cards will not improve your credit score or demonstrate responsible use of credit. You should only make purchases with your credit card, and make sure you are paying the bill in full and not surpassing your credit limit each month.
You should also try to find a credit card that can eventually be upgraded (also known as graduated) to an unsecured credit card once you’ve been able to demonstrate responsible spending and payment habits. Most lenders report to the credit bureaus, but not all of them do, so be sure to check. Many credit unions and some banks offer secured cards, which can be a better option than traditional cards due to their low fees and interest rates.
7. Don’t Apply for New Credit
The best way to improve your credit score for a mortgage is by paying down debt and not opening new accounts. This will allow you to reduce your debt-to-income ratio, which is one of the most important factors in a lender’s decision process.
Getting a new credit card or loan can lower your score by introducing new information to your report, which can be considered a risk factor for lenders. New credit can also impact your average account age and credit utilization ratio, which are key components of a FICO score.
Credit inquiries (which are triggered when you apply for credit) can also impact your credit score, especially if they’re hard inquiries that you authorized by applying for the loan or credit card (as opposed to soft inquiries, which are pulled automatically by the bureaus for some purposes, such as when you check your own report). So, if you’re planning on purchasing a home in the near future, it might be wise to avoid opening any new accounts or loans unless absolutely necessary.
8. Keep Your Accounts in Good Standing
The most effective credit-building strategy is paying bills on time and keeping balances low. That’s because your record of on-time payments is the largest factor in both FICO and VantageScore credit scoring models. A single late payment can hurt your score for seven and a half years.
It’s also a good idea to keep your oldest credit cards open. This can help to improve your credit utilization ratio, which is the second largest factor in a credit score. Moreover, keeping your old accounts open can improve your average account age, which is another important aspect of a credit score.
Mortgage lenders look at your credit scores when you apply for a mortgage. A higher credit score usually leads to a better mortgage rate, saving you thousands of dollars over the lifetime of your loan. Even if your credit score is below what you need to qualify for a mortgage, there are strategies that can improve it in relatively short order. With patience and consistent responsible behavior, you can achieve a score that’s ideal for obtaining a great mortgage rate.
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