The good news is you’re after a mortgage. Once your credit gets over 620 there are some loan products out there to fit your credit profile. However, your chances of getting a loan improve massively once you get over 650 and particularly over 720. With an extremely hot real estate market and many all-cash offers being made, if you intend on buying a home with a mortgage, you need to bring your ‘A’ Game. That’s why it’s worth working on getting stellar credit before you consider getting a pre-approval letter. Here are some of the main ways to improve your score.
1. Take a strategic approach to pay off your credit cards
If you are able, there may be a temptation to pay off your credit cards in one fell swoop, leaving a zero balance at which point you might want to put them in a drawer and forget they never existed. That might not be the best move to improve your credit. Keeping balances on credit cards under 30% is key. It shows that while you use credit, you are diligent at keeping balances low and the lower the better, as long as it’s not zero. According to credit scoring company FICO, people with a credit score of at least 785 maintain a 7% of credit utilization on their cards.
Paying down credit card debt is one of the fastest and most effective ways to boost your credit score. Other than paying on time, it's the second most influential factor in improving your credit score.
2. Higher credit limit
If you’ve paid off a chunk of credit card debt you might receive a letter or e-mail informing you that your lender had increased your credit limit, without you even applying for it. That’s because the cycle of borrowing and conscientious payments with low credit usage signals to lenders that you’re a safe bet to lend to. The increased limits and low debt balances will result in an instant credit score increase.
3. Becoming an authorized user
One of the oldest tricks in the book to improve or gain credit is to become an authorized user on a friend or relative’s card. If the card owner has good credit, their positive payment history will reflect well on you, boosting your score in the process. The holder is protected because they only need to add your name, not give you a card or allow you to use theirs. They will continue to make payments as usual.
If you have no previous credit history, the results of being an authorized user could be instant, jump-starting your credit history and eventually allowing you to get credit in your own name.
4. On-time payments
This is a biggie. If you make late payments your credit score will sink faster than the Titanic. What’s worse, it’s not easy to fix, a late payment of over 30 days or more stays on your credit for 7.5 years.
That doesn’t mean you should bury your head in the sand if that occurs. Call your creditor immediately and ask if they can consider not reporting the late payment to the reporting agencies and agree to make immediate arrangements for the arrears. Some creditors will state that the reporting occurs automatically and is out of their hands. In that case, pay asap and continue to make on-time payments to claw back your good standing.
5. Dispute credit report errors
Credit reporting agencies are known for making mistakes. Disputing these errors could potentially remove bad information raising your score.
The first step in pinpointing mistakes is to get a copy of your credit report from the three major reporting agencies. You are entitled to request it for free once a year using AnnualCreditReport.com. Common mistakes include stating late payments that were paid on time or mixing in someone else’s credit history (often with a similar name) with yours.
Disputing errors can be painstaking but rewarding especially if there are major mistakes such as reporting late payments that aren’t yours.
6. Address collections accounts
If an account is in collections it has a smoldering toxic effect on your credit. Any good work you do elsewhere by paying off other accounts on time will be undermined. Paying off an account in collections removes the immediate threat of a lawsuit and a possible judgment. However, failing that, contact the creditor and work out a payment plan and stick to it. If a collection is beyond the statute of limitations for a lawsuit, you can request that it be removed. The effect an older account in collections has on your credit varies depending on the scoring model used to create your score (FICO 8 or VantageScores). Its effect will diminish over time but you mustn’t ignore it.
7. Secured credit card
If you cannot get a regular credit card because of bad or no credit history, getting a secured credit card is a no-risk way to create better credit. In essence, a secured card allows you to borrow your own money. It is secured because you pay for it by depositing an equal or greater amount to a lender. For example, you can receive a $1000 secured credit card by first making a cash deposit of $1000 to the card’s account. Then you use the card and make timely payments to increase your credit score. This is particularly helpful for someone with new credit or blemishes on their payment history. It’s important to establish a consistent record of usage and payments over several months to boost your score.
8. Credit for rent and utility payments
Some credit reporting agencies such as FICO 9 & 10 and VantageScores do consider on-time rent payments when calculating your score. You'll need to ask your landlord or their management company to verify your payments. Multiple services (Rent Reporters, Rental Kharma, LevelCredit, CreditMyRent) charge a fee to report on-time rental payments to the agencies if your landlord isn't compliant.
You’ve probably seen the ads for Experian Boost which similarly reports on-time utility payments to Experian. You’ll need to link your bank account to Experian and specify which payments you want to be added to your credit report. You can even include Netflix payments! Experian will then scan your account for those transactions. Though this may not produce as dramatic results as some of the other techniques, if you can boost your FICO score for paying your phone, streaming, or utility bills on time, then why not do it?
9. Mix up your credit
Your credit score will improve if you have a diversified credit mix. If you only have credit cards, only a mortgage, or just student loans, consider adding other types of credit to boost your score. It can have dramatic results.
Summary
A high credit score is so coveted because it gives you options to borrow, which in turn can allow you to buy things, such as a home at a lower interest rate. The good thing about credit scores is that they are not set in stone. By following the nine steps above, you can boost yours and in turn save money on low rates, or even make money by leveraging money to buy investments such as rental properties, or even become a lender yourself by lending at a higher rate than which you are borrowing.
