Maybe your credit history isn’t exactly stellar. Sure, you’d like to be a homeowner one day—maybe even one day soon. But that recent run of bad luck and/or bad decisions showing up on your credit report doesn’t put you or your credit management skills in the best light for potential mortgage lenders.
Or maybe your credit score is fine. But it’s not great. And you know that you want to do everything you can to improve your credit profile before applying for a home loan.
Credit scores matter when it’s time to buy a home. People with the best credit scores get the best rates and offers from potential mortgage lenders. Those with low credit scores have a tough time finding a mortgage lender at all.
If your current credit score isn’t quite up to snuff, or if you just want to improve your credit score before taking on a mortgage, don’t despair.
People without perfect credit histories buy homes all the time.
The best way to go about improving your credit profile will depend a little bit on how long you’ve got between when you start addressing your credit issues and when you want to apply for a mortgage.
If you’re thinking about buying a home in the next few months, you can check out some shorter-term strategies for protecting your credit score during the home buying process here.
But if you’re more than a few months out from joining the ranks of America’s homeowners, or if your score needs some major improvement before you can qualify for a mortgage at all, read on for some longer terms strategies for improving your credit score.
First Things First: Check Out Your Current Credit Reports
Remember, you can’t fix anything until you know what your current credit situation is. So if you haven’t done so already, get copies of your credit reports right away. (If you could use a quick refresher on how credit scores work and how to read your credit reports, we’ve got you covered here.)
Check your reports for errors. Dispute mistakes if you need to. You can check out our handy guide for disputing errors on your credit report here.
How Your Credit Score is Calculated
The folks at the Fair Issac Corporation (better known as FICO) are pretty tight-lipped about the exact calculations they use to determine a person’s credit score. But they do give rough breakdowns for what data they use to make their score calculations. For just about everyone, the credit score calculation breaks down as follows:
Credit Score Factors
35% – Payment History
30% – Amount Owed Compared to Available Credit
15% – Length of Credit History
10% – New Accounts
10% – Account Mix
If you are very young, are new to the U.S., or have some other reasons for having basically no credit history, the score model is slightly different. But for most folks, those are the rough percentages.
Payment History – 35% of Credit Score
It may seem pretty basic. But the most important factor in determining your credit score is whether or not you pay your bills on time.
Credit Cleanup Strategy: Pay Your Bills On Time
If you’ve been paying all of your bills on time, fantastic. Do everything you can to keep it that way.
If paying on time has been an issue for you in the past, those old late or missed payments are probably dragging your credit score down.
The good news is that the more time you can put between your last missed payment and the present, the better off you’ll be. Recently-missed payments matter more for your credit score than missed or late payments that happened further in the past. Anything older than seven years should fall off your credit report entirely.
Credit Cleanup Strategy: Catch Up Delinquent Accounts Before They Go to Collections
If you have current accounts that are late or delinquent, do what you can to catch them up. Do you have a difficult situation that’s preventing you from meeting your current financial obligations as they stand? Call your creditors. Explain the situation. You may be able to negotiate a lower interest rate. Or perhaps a new repayment plan, with a lower monthly payment or more time to repay a loan. Remember, your creditors would almost certainly rather get some of the money you owe them than none of it.
(Longshot) Credit Cleanup Strategy: Ask for a Goodwill Adjustment
Was the late or missed payment a one-time deal? Is your account currently in good standing? Then it may be possible to request a goodwill adjustment from your creditor.
With a goodwill adjustment, a creditor may stop sending the negative information to the credit reporting bureaus. Creditors are not allowed to specifically remove negative information from your credit history. But some have been known to stop reporting old negative information from time to time. If you’ve got an otherwise spotless credit history, and a good reason for your past slip-up, it can’t hurt to ask. Plus, it’s pretty easy. Just send a nicely-worded letter explaining the situation and ask if a goodwill adjustment would be possible.
Amount Owed Compared to Available Credit – 30% of Credit Score
Your credit utilization rate is the percentage of your available credit that you currently owe your creditors. If you have a credit card with a $1,000 credit limit and a $500 balance, then your credit utilization rate for that card would be 50%.
Credit Cleanup Strategy: Pay Down Credit Card Balances
For the best possible credit score, you’ll want to get your credit utilization rates down below 30% for all of your credit cards.
That means you’ll want to make sure that no specific credit card balance is over 30% of the limit on that card. And that you’re not using more than 30% of the available credit on all of your credit cards combined.
For most folks, this is the easiest and most straightforward way to improve their credit score. If you’re carrying balances over 30% of your credit limits, paying those balances off can significantly improve your score.
Plus, lowering your credit card balances now will help when the time comes to apply for a mortgage later. Your future mortgage lender will use your monthly debt-to-income ratio to calculate how much mortgage you can afford to pay each month. The less you owe the credit card companies each month, the more a lender would be willing to loan to you to purchase a home.
Credit Cleanup Strategy: Ask for Increased Credit Limits
Of course, lowering your balance is just one way to adjust the amount owed compared to your available credit. You can also ask for a credit limit increase, which should also improve your credit score. That is, assuming you don’t use your new, higher credit limit to buy more stuff.
Length of Account History – 15% of Credit Score
Hopefully, you opened your first credit card in your early twenties. Sure, it might have a terrible interest rate. Or maybe it’s a store card for a place where you no longer really shop. For your credit score, that doesn’t really matter: having a long relationship with existing creditors shows potential new lenders and creditors that you’re trustworthy.
Credit Cleanup Strategy: Keep Old Accounts Open
It may be tempting to close your oldest accounts, but doing so could potentially hurt your credit score. Keeping those accounts open should increase the overall average age of your credit accounts. Longer credit histories show lenders that they can trust you that as a borrower.
Credit Cleanup Strategy: Piggyback On Someone Else’s Credit History
If you have a spouse or relative with a long and excellent credit history, ask if he or she would be willing to list you as an authorized user on one of his or her credit cards. If you are added as an authorized user of someone else’s credit card, that card’s credit history will begin showing up on your credit report.
This is a situation that requires pretty significant trust for both parties. Ultimately, your spouse or relative would be responsible if you ran up a bill with the newly shared card. And of course, your credit history would be impacted if your relative suddenly stopped paying his or her bills. But if you can swing it, being an authorized user on a new account can give you a long credit history if you haven’t had a card of your own for very long.
New Accounts – 10% of Credit Score
In the in the short term, seeking new credit lowers your score a bit.
(Short-term) Credit Cleanup Strategy: Don’t Apply for a Ton of New Accounts
Applying for dozens of new credit cards all at once can really torpedo your credit score—especially if you don’t get approved for them. Do your best to avoid seeking new credit for at least six months before you want to apply for a mortgage.
(Long-term) Credit Cleanup Strategy: Consider Applying for a New Card or Line of Credit
If you have more than six months between now and when you want to apply for a mortgage, opening a new line of credit can potentially improve your credit score. You may get a quick ding to your credit score for seeking credit. But you can potentially increase your overall available credit with a new line of credit. Avoid carrying a balance on your new credit card, and increasing your total available credit should improve your credit score.
Account Mix – 10% of Credit Score
Lenders and creditors like to see that a potential borrower can handle more than one kind of tradeline, or credit account. Think student loans and credit cards. Or a mortgage and a car payment.
(Long-term) Credit Cleanup Strategy: Consider Applying for a New, Different Kind of Credit
If you’ve only got a single type of debt on your credit history, you might consider applying for a different type of loan to show a future lender that you’re a responsible borrower who can handle more than one type of credit agreement.
Now, that said, we absolutely would not recommend paying interest just to improve your credit mix.
So, for example: a debt consolidation loan could allow you to pay off existing credit cards at a lower interest rate. Can you avoid running up the balances on the cards you’d be paying off? If so, a debt consolidation loan could improve the part of your credit score related to your credit account mix. And of course, if could save you some money on interest.
If that sounds overly complicated, or you’re worried that you’d just be running up additional debt, don’t sweat it. It’s only 10% of your credit score. Plus, as an extra bonus, your future mortgage will count towards this factor in the future.