How to Boost Your Credit Score Before Applying for Financing
If you’re shopping for a new home, chances are that you will also be applying for a mortgage. And you’ll most likely want to maximize the amount you can borrow to help you purchase this new home. Since potential lenders will check your credit before approving you for a mortgage, it’s wise to improve your credit score before applying for financing. Luckily, there are ways to boost your credit score to help your chances of getting a mortgage at a good rate.
How Important is Your Credit Score?
Lenders use your credit report and credit score to track how you have handled credit in the past and as an indicator of how you will handle it in the future. A high credit score indicates a low-risk, responsible borrower and will likely help you gain future credit.
Whether you are applying for a credit card, buying a car, or hoping to get a mortgage, your credit score will be taken into consideration. A bad credit score can result in difficulty getting a loan or mortgage, and you may need a co-signer or have to pay a higher interest rate.
Factors That Affect Your Credit Score
Credit bureaus and lenders don’t share the formulas they use to calculate credit scores. But we know that some factors play more of a role in your credit history than others. Some things that may affect your credit score include:
- The length of time that you’ve had credit
- If you carry a balance on your credit cards
- The amount of debt you carry
- How much credit you use
- How often you miss payments
- If you’ve ever filed for bankruptcy
- Whether you’ve ever had debt sent to a collection agency
Make Payments on Time
The first step to improving your credit is to take control of your bill payments. Take stock of all your bills, note all the due dates and avoid late payments at all costs. Set up automated payments where possible to help ensure you always make payments on time. If you can’t pay the full balance, always pay at least the minimum amount and more when possible.
Don’t skip payments even if you have been given a “payment holiday” or are disputing a charge. And if you foresee problems paying a bill, contact the lender right away to make alternate arrangements.
Pay Off Debt to Improve your Credit Score
Creditors look at your current credit to determine if they should lend you more money. If you have large amounts of debt, it could hurt your chances of getting a mortgage or other loan. Focus on paying down existing debt if you’re planning on buying a house and want to apply for financing.
Start by paying off any small debts that can be quickly removed from your plate. Then switch your focus to paying off the debt with the highest interest rate. After that’s paid, move to the debt with the next highest interest rate. This will help minimize the amount of your payment that’s going towards interest instead of your principal debt.
Don’t Max Out Your Credit
Borrowing more than the authorized limit on a credit card can lower your credit score. And if you use most of the credit you have available, lenders will view you as a greater risk. Ideally, you should aim to use less than 35% of your available credit.
It’s better to have a higher credit limit and use less of it each month. Consider asking for an increase on your credit limits to improve your credit utilization ratio. But make sure you don’t use the extra credit, or this could hurt your credit score even more.
Avoid Taking on Excess Credit
On the flip side, while you don’t want to max out your available credit, you also don’t want to take on too much credit. Applying for new credit cards and loans will cause your score to drop, especially if you are applying for new offers regularly. An abundance of credit applications can make lenders nervous because it indicates you are spending more than you can afford.
Check Your Accounts
Regularly monitor your accounts to ensure that payments are clearing and that the right amount was paid. Missed payments will appear on your credit report even if the error was not your fault.
You also want to check for errors and inaccuracies in credit card statements and credit reports. Errors that can be corrected such as missed payments that were actually made, can help improve your credit score. Inaccuracies or suspicious activity on your credit report can be a sign of identity fraud and should be looked into immediately.
If you’re thinking about buying a house, it’s important to understand your credit history and buying power. Get in touch with us today to learn more about how to improve your credit score before applying for financing. Our team of Ottawa real estate agents have the experience and knowledge to help you every step of the way.