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One of the biggest parts of buying a home is securing a mortgage. The process of securing a mortgage involves an approval from a lender, and lenders, of course, take your credit score into consideration when making their decision. You want to ensure you have a good credit score to increase your odds of securing the mortgage you want, with the lowest interest rates. If you think you need to increase your credit score before you can get a mortgage, don’t worry! There are lots of simple ways to raise your score without altering your lifestyle too much. Try some of these basic fixes to see how much of an impact they can have on your credit score.
What credit score do I need?
How do you know if your credit score is in good standing? Credit scores can range from 300 to 900, and each score fits into a certain category. Scores above 650 are usually considered good, with 720 and up considered very good, and 800+ in the ‘excellent’ range. So, if you’re in the 650+ range, your score may already be good enough to qualify for a mortgage. If you think you need to increase your credit score, the good news is, it’s easier and quicker to raise your score when you start from a lower point.
Credit score requirements vary by lender, so there’s not one particular score you need. However, many people have room for at least a little bit of improvement! Apps like Borrowell and Credit Karma track your Equifax or TransUnion credit scores, and they are free to use. Checking these apps has no impact on your score (more on that in a bit), so it’s a great way to stay on top of your progress.
Pay on time (and more than the minimum)
Your payment history is probably the most important deciding factor in your credit score. This shows how reliable you are with making your payments, and how much you pay each month. Lenders need to know your history with making payments before they approve you for a mortgage. Late payments take some time to be cleared from your history, which can affect your score, so it’s best to always pay on time to ensure you don’t have any marks on your record.
Paying the minimum amount will keep you afloat and might give you a good credit score, but you can increase your credit score by paying more. The more you pay off each month, the lower your usage will be – you’ll always have a good amount of credit available if you pay more than the minimum. Also, remember that the balance on your credit card gathers interest each month. The higher your balance, the more interest you will owe back.
Use credit wisely
Just because you have a certain amount of available credit, that doesn’t mean you should burn through all of it. When you use too much credit, many lenders might interpret this as a sign that you’re already taking on as much debt as you can. This can make them hesitant to give you a loan because they may see you as a higher risk.
On the other hand, you need to use your credit cards enough to get an accurate score. If you never use any credit, you can’t get a score that properly reflects your payment habits. In general, it’s recommended to use 30 per cent of your available credit or less each month. By hovering just under that amount, you’re using enough credit for an accurate score, but not so much that it looks like you have more debt than you can handle.
Accept a higher credit limit
You can also increase your credit score by taking on a higher credit limit. If you have the opportunity to raise your credit limit, take it – as long as you don’t think it will make you spend more. If you maintain your current spending habits, but you have more available credit, this will lower your credit utilization ratio. This is the amount of credit available vs. the amount you spend. A low credit utilization ratio makes you look responsible and worthy of securing a mortgage for buying a home. Sometimes you will be offered a credit increase, and other times you will have to request one.
Be careful of credit checks
Credit checks can either be “hard” or “soft” inquiries. Hard inquiries happen when you apply for new credit or a loan, and your potential lender needs to check your score as part of their approval process. One hard inquiry won’t affect your score too much, but try to avoid too many of these inquiries too close together. This can signify you have plans to take out a bunch of new loans and gather up lots of new debt, which might make a lender consider you a high risk. Higher risk borrowers won’t have the same opportunities for lower interest rates when getting a mortgage. Avoid these checks as much as you can leading up to the time you apply for a mortgage.
Soft credit inquiries are more informal – they are often used when a potential employer checks your records, or if a bank wants to see if you qualify for a new product. These checks won’t affect your score, because it’s not part of an approval process for any kind of new credit. Checking your own score, such as using the apps we mentioned earlier, is a soft inquiry.
If you need to increase your credit score to have a bit more confidence in your ability to get a mortgage, this is a great place to start. It’s best to go into the homeownership experience with the highest score you can secure.