If you have applied for any type of loan in the past, you know that your credit score determines a large part of your eligibility for approval. Lenders use your credit score as a numerical indication of your financial responsibility. Your credit score can determine your interest rate, the amount you are approved to borrow, or whether you can be approved at all.
If there is room for improvement in your credit history, follow these do’s and don’ts to help raise your credit score.
Check for errors
Get a copy of your credit report each year. According to the Federal Trade Commission, an estimated one in five credit reports contains a serious error. Disputing credit report errors is one of the fastest ways to improve your score. For example, an inaccurately reported late payment can drop your score 60 to 110 points, depending on your credit history.
Negative items, not including bankruptcy, should only appear on your credit report for seven years. Bankruptcy can remain on your report for ten. Commonly disputed items include:
- Reported late payments that were actually on time
- Inaccurate credit limit
- Inaccurate loan or account balance
- Accounts that do not belong to you
- Inaccurate account status, such as a past due account which is current
Pay down your credit cards
While paying off installment loans, like mortgage, auto, student, etc. can help increase your score, paying off revolving accounts, such as credit cards, will increase it faster. The amount owed on your credit accounts is one of the factors that affect your credit score.
Carrying a balance doesn’t necessarily make you a high-risk borrower, but a high percentage of credit lines in use or “maxed out” do lower your score. Most debt experts recommend keeping your credit card balances below 30 percent of the credit limit on each card; below 10 percent is ideal.
Don’t close old or unused accounts
Contrary to what you may believe, closing credit accounts that often carry a zero balance will not increase your score for several reasons. It is very rare that closing a credit card improves your score. Closing your accounts not only lowers the amount of revolving accounts, which is an indication of creditworthiness, but it also decreases your total amount of available credit. Lower available credit means a higher credit utilization rate if you are carrying balances on your open cards.
It is ok to close a newer credit card that you are no longer using, as long as the card doesn’t have a balance and you have other credit cards in your credit mix.
Pay your bills on time
Seems like a bit of a no-brainer, but payment history is a huge part of what determines your score. If you are forgetful, sign up for payments to automatically withdraw from your account.
Don’t open new credit accounts
Each time a business requests a copy of your credit report, it is called an inquiry. There are two types of credit inquiries: soft or hard. Soft inquiries are acquired by businesses, such as insurance companies, employers, etc. who need to access your credit report for acceptable reasons.
Hard inquiries are the only inquiries that affect your credit score. These types of inquiries occur when applying for credit cards or a loan.
Hard inquiries on your credit report can indicate risk as a borrower – too many in a short period of time may mean that you are financially overextended or taking on too much debt and looking for credit to bail you out.
Not all credit reports are created equal
Remember that your credit score isn’t determined solely on recent actions. Years of past credit behavior are taken into account to determine your number. It’s impossible to determine how one specific action will affect an individual’s credit score, but the above recommendations will help keep you on the right track to better credit. Be patient and persistent with your improvements – your credit wasn’t damaged overnight, so don’t expect immediate results.
If you are thinking of buying a home in the near future and need to know where your credit stands, or how you can improve it, contact one of our mortgage bankers today.
Looking for more information on buying a home? Our Mortgage 101 Handbook is the ultimate guide for First Time Home Buyers.