Your credit score is important when you’re buying a home. It helps determine what kind of mortgage you can qualify for and the interest rate you’ll be. To improve your credit score, there are a few things you can do.
What Determines Your Credit Score?
To understand how to improve your credit score, it would probably help to understand what factors determine the score.
Your FICO credit score is made up of 5 things:
- Bill payment history – 35%
- Credit utilization- 30%
- How long accounts have been open – 15%
- Variety of credit sources – 10%
- Inquiries for new credit – 10%
Knowing these things, here are five ways you can increase your credit score.
Pay Your Bills on Time
We know this isn’t always easy, but it’s important for this discussion. Creditors such as mortgage lenders want to see that you’re able to pay bills on time. That’s why it’s the largest factor in your credit score.
This doesn’t just apply to credit cards. Make sure you’re also paying other bills such as student loans and utilities on time.
Keep Credit Utilization Ratio Low
Credit utilization ratio refers to how much of your available debt you are using. For example, let’s say you have two credit cards – one has a credit limit of $10,000, the other is $5,000. Add them together and your maximum is $15,000.
Now let’s say you have a balance of $3,000 between those two cards. That means your ratio is $3,000/$15,000 = 20%.
A goal to shoot for is under 30%. In the above example, that means you shouldn’t have a balance of more than $4,500. By keeping your ratio under 30%, it will help your credit score keep climbing.
Keep Your Accounts Open
Some credit accounts don’t make sense to remain open forever. Once you pay off a student loan, it’s gone.
Credit cards don’t work that way though. You can essentially keep a credit card open for decades as long as you always pay on time.
When you’ve been in debt for a while and pay off a credit card, it might be tempting to close it. There are two reasons why you should keep it open though:
- It raises your maximum credit limit, so it’s easier to stay under the 30% credit utilization ratio we just discussed
- Your FICO credit score accounts for having a long history with a credit card
You don’t have to use the card, just keep it open. Feel free to freeze it in a block of ice or put it in a drawer where it won’t be used.
Have a Variety of Credit Sources
Ideally you don’t just have one type of credit – credit cards. It’s best to build up credit by having multiple sources such as utilities, phone bills, or a car loan in your name.
Having a variety of credit sources shows you’re someone who can be trusted to pay your bills.
Don’t Apply for More Credit Unless You Need to
Last, don’t open any new credit unless it’s really necessary. If you start opening a lot of new credit cards or loans in a short period of time, it will hurt your score.
Do you have any other questions about how to improve your credit score? Maybe you want some help with the home buying process? That’s what we’re here for! Give us a call at 949-392-6400 and we’ll answer any questions you have.