4 Ways to Improve Your Credit Before Applying For a Loan

A Higher Credit Score Could Be Your Next Step Towards Applying For a Mortgage

By

Matt Lyons

on

Jan 21, 2021

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When it comes to home buying, a credit score is a pretty heavy factor that will determine how qualified you are for the purchase by a lender. A credit score will play a large role in determining the interest rate you’ll receive once you apply for a mortgage, which can include home loans, personal loans, credit cards, and other forms of credit. 

Tips for Improving Credit

Taking the steps to improve a credit score is a process, and could take several months of consistent and healthy credit habits. Check out some of these tips to help guide you to that better score!

Make Monthly Payments on Time

One of the most important things you can do to raise your credit score is paying your bills on time. Payment history makes up to 35% of a FICO score,  which makes it such an important factor when determining a credit score. When you are able to keep up with credit card payments, you are showing your lender that you’re able to take out a loan when the time comes and pay it back. Other than credit card bills, you also need to make sure other bills like utilities, medical bills, and even student loan debts are being paid on time. 

Oftentimes life can get busy, but that is no excuse for forgetting to pay any of your bills on time. It’s recommended for those more prone to forgetting to pay bills to use autopay, or set up automatic transfers from your bank account to your bills. By taking either of those steps, you can say goodbye to manual payments while also reducing the times you might miss payments.

Lower Your Credit Card Balances

Your credit utilization ratio refers to how much credit you’ve used that’s divided by your total credit. It’s recommended to keep your total utilization below 30%, with below 10% as the best. Making monthly payments on time can raise your credit score, on time payments will also help to keep your utilization low. Even if you can’t afford to pay your credit cards in full each month, it’s still important to be consistent with monthly payments. 

If you’re already carrying a bit of credit card debt, consider opening a credit card with a 0% APR intro period. Features of this credit card include:

  • Initial period of 12 months or more where you won’t be charged interest on your monthly payments.
  • You can transfer an existing balance to the credit card and even pay it off during the initial period. 

The U.S. Bank Visa Platinum Card and the Citi Simplicity Card are among the best introductory no-interest cards for balance transfers and new purchases. Look at where you stand in terms of credit score and take the time to look at your various options wisely.

Continue to Check Your Credit Reports and Scores

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It’s important to keep up with where your credit stands when preparing for something like a mortgage. You can get credit reports from all three credit bureaus, which include Experian, TransUnion, and Equifax. Here are some things to look out for once you receive your report:

  • High account balances concerned with your credit limits. Paying your balances down will help your credit scores.
  • Past-due accounts, charge-offs and accounts in collections. Bring all accounts current and pay off any outstanding collection accounts.
  • Look out for loans or credit accounts that shouldn't be there, which actually indicate possible criminal activity. 
  • Payments incorrectly listed as late or missed. If there are any errors, you can file a dispute with the bureau from which you received the report.

Don’t Open Too Much Credit

Companies like FICO and VantageScore will not only look at the overall credit score, but also the number of credit inquiries such as applications for new financial products and the amount of new credit accounts a person is opening. Each time you apply for a new credit card/loan, a hard inquiry will be run into your credit report that “dings” your credit. This can temporarily lower your score. 

The only times you should go forward with a credit application are ones that are absolutely vital to your financial health. Before you apply for a mortgage, there should not be any new lines of credit opened for at least a few months beforehand. 

When it’s time to apply for a mortgage, you should be submitting your pre-approval application to a variety of different lenders. It’s important to note that a credit file being pulled does not have any added damage on the credit score, it just has to be within a 45-day window. If you’re looking to get through the pre-approval and submission process quickly, check out lenders like Ally Bank and SoFi. Ally Bank is known to offer mortgage pre-approval in as little as three minutes, and SoFi offers a mortgage application process that is completely online with fast pre-qualification.

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Other Ways to Improve Your Chances of Getting a Mortgage Offer

Besides working on improving a credit score, there are some other factors to focus on when hoping to get success with a mortgage. These can include:

  • Save for a large down payment: Lenders appreciate borrowers who have discipline when it comes to savings. The more cash you have to put down on your new home, the less you'll have to borrow. You will also spend less over the course of repaying your mortgage. 
  • Use a mortgage broker: If you’re struggling to get offers with the traditional loan application process, you can work with a mortgage broker who could help set you up with a lender and loan that are best fit for your needs.

To say the least, credit building is a process that won’t just happen overnight! Once you start forming healthier habits and keeping up with your score/reports, you will be one step closer to getting that loan you’ve been wishing for. Good luck!

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December 20, 2022
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