Blog posted On April 21, 2021
There are certain factors that are out of your control when getting a mortgage rate. You can’t control the Federal Reserve, bond market, or any of the economic factors that influence rate trends. However, you can control your credit score. Your credit score shows lenders how good you are at borrowing money and repaying debts. The higher the score, the better. By improving your credit score, you could qualify for a lower mortgage rate and save money over the life of your loan.
Improving your credit score is easier than you may think. It doesn’t require you to stop spending money. It just takes a little extra monitoring and focus. If you follow these simple steps, will likely see your credit score improve.
Your payment history is the biggest factor when determining both your FICO credit score and VantageScore. If you have a proven history of paying back debts on time, it’s likely that you will manage debts well in the future as well. So, to keep your credit score higher, “you want to avoid things like late payments, defaults, repossessions, foreclosures, and third-party collections,” says John Ulzheimer, credit expert, formerly of FICO and Equifax.
Your credit utilization rate is the amount of money you currently owe divided by your total credit limit. If you have a total of $5,000 in credit available and a balance of $2,500, your credit utilization rate is 50%. In general, the lower your credit utilization rate the better. A higher credit utilization rate can signal that you’re using too much of your available credit and therefore indicate greater risk for lenders. Your target rate will vary depending on your scoring system. Less than 10% utilization is optimal for FICO scores, but less than 30% utilization is good for VantageScore
Up to 30% of your credit score is based on your credit utilization rate. In most cases it’s the second most influential factor on your credit score. “The higher that ratio, the fewer points you’re going to earn in that category and your scores are absolutely going to suffer,” Ulzheimer says.
It might seem like keeping old accounts open would negatively affect your score. But fully paid debts are a good sign to lenders. This shows that you have experience paying off high interest debt and you have the ability to pay them on time and in full. Closing a credit card account, even if it’s paid off, can actually negatively affect your score because it will lower your maximum credit limit. By lowering your maximum limit, your utilization rate will likely go up.
“An account that’s paid in full is a good thing; however, closing an account isn’t something that consumers should automatically do in the hopes that it will positively impact their credit score,” says Nancy Bistritz-Balkan, vice president of communications and consumer education at Equifax. “Having an account with a long history and solid track record of paying bills on time, every time, are the types of responsible habits lenders and creditors look for.”
Applying for new lines of credit requires a hard inquiry on your report, which lowers your score temporarily. Before you apply for a new line of credit, make sure that you need it and you’re likely to get approved. If you can, try to get a preapproval for your new line of credit. Often times with a preapproval you will not require a hard credit pull. Unlike hard credit pulls, soft credit pulls don’t affect your credit score.
Checking in on your credit score every couple of months can help you see how well you’re managing your credit or if you need to make any changes. You also want to check your credit report in case of any mistakes.
The easiest way to check your credit report is by using one of the three major credit bureaus (Experian, TransUnion, and Equifax). Through April 2022, you can request one free report per week from any one of the bureaus. From May 2022 on, you will only be allowed one free credit report per year.
The higher credit score you have, the better mortgage rates you’ll get (most likely). We want to help you get the best mortgage rates possible, so if you have any other questions on how to raise your credit score before you apply, let us know.