Your credit score is crucial when it comes to getting a mortgage. Here are some tips for how to get a good -- or great -- credit score.
If you are curious about how to get a good credit score, you’re not alone. Your credit score affects everything from your ability to open new credit cards to the type of loan you can get to buy a home.
Like anything worth having, solid credit takes time to attain. But with some knowledge, diligence, and consistency, a great score — and the benefits that come with it — is within reach.
Having a good credit score opens doors to financial opportunities — and savings. The better your credit score, the greater your chances of qualifying for a mortgage, a car loan, a credit limit increase, and other types of financing.
Good credit counts in other areas, too. Insurance companies may reward you with cheaper policies if you have an excellent score. Landlords often run credit checks when evaluating potential tenants, and those with the top scores have an edge.
Your credit score will also dictate the terms of the money you borrow. If you have an excellent credit score, your lender will see you as a lower credit risk and may extend more favorable terms to you, such as a lower interest rate or even a higher loan amount.
And saving money on interest alone should be an incentive to work on your credit score, because a low rate on a large purchase like a car or home can save you thousands or even tens of thousands of dollars over the life of your loan.
Credit scores vary based on the type of loan you’re applying for and who is pulling your credit, as there are many different algorithms used.
For instance, your credit profile will be evaluated slightly differently for credit cards, auto loans, mortgages, and personal loans based on the type of financing and the risk factors in that category.
That’s why the credit score you see through a free consumer app will likely be higher than, say, the mortgage credit score your lender pulls when you apply for a home loan. Since a home is a major investment, mortgage lenders use a tougher scoring model to ensure borrowers can pay them back.
Some of the factors that they will look at are your history of on-time payments, amount owed, credit mix and more. While the debt-to-income ratio (DTI)* does not impact the score, this will also be factor when looking at how much a borrower may qualify for.
Aside from variations in credit scores, there are two different credit scoring models: the VantageScore and the FICO® Score. Both of these change over time, as they are updated to be more predictive as new consumer borrowing data becomes available.
But for the purposes of this article, we will be referring to the FICO credit score model.
FICO scores range from 300-850. Here’s how they break down, according to Experian:
A number of factors affect your credit score, but they’re not all given the same importance.
Your payment history reflects whether you've made on-time payments for existing loans or lines of credit.
Credit utilization is a ratio of how much credit you are using versus how much available credit you have.
This refers to how long your accounts have been open.
Having different types of credit, i.e., credit cards, car loans, mortgages, etc. can reflect well on your credit score.
The new credit metric looks at how much credit you requested within the past six months to a year.
The two biggest factors to focus on are payment history and credit utilization, since they make up the bulk of your credit score. But there are a number of habits and behaviors that can help your score over time.
Payment history carries the most weight when it comes to your credit score. that is why it is crucial to pay your bills on time each month. Having even one late payment can drastically reduce your credit score and it can take a while to recover. It is important to be proactive and either set up automatic payments for your bills or create a calendar reminder to help you stay on schedule. Doing so can help you and avoid late fees and negative marks on your credit report.
Another way to improve your credit score is to keep your utilization ratio low on your revolving accounts.. This means that you have more credit available than credit that you’ve used.
Experts recommend having a credit utilization ratio of 30% or less. So, if you have a credit card with a $5,000 limit, you’d want your balance to be no more than $1,500. While 30% is the general rule of thumb, keeping the utilization at 10% is ideal and in many cases will provide best overall score outcome.
But the lower your balances are, the better you look to lenders and other creditors. Carrying high balances overtime can make it seem like you’re struggling to manage your bills, and lenders may be concerned that you’re more likely to default on loans or credit they offer you.
A low balance is easier on your budget, and it gives you a better chance at qualifying for new financial opportunities.
When you pay off a credit card account, your first instinct might be to close it. Out of sight, out of mind, right? But keeping the account open can help in two ways.
The first is your credit utilization ratio. Having credit available to you, but not carrying a balance on it, shifts the utilization rate in your favor.
Keeping accounts open also lengthens your credit history, and lenders like to see that you’ve successfully managed credit for long periods of time.
Just because you have an account open doesn’t mean you need to use it. You might choose to keep the line active by making a small purchase on it and paying off the balance in full every month or two. But avoid running up the balance again, because you could end up paying down high-interest debt, and your credit score might suffer.
It’s important to check your credit report regularly. You can request your credit report from each of the three major credit bureaus — Experian, Equifax, and TransUnion — for free each year at annualcreditreport.com. Review each of these reports to ensure that all of the information is accurate and that there are no signs of identity theft.
Some banks offer free credit monitoring with your bank account or credit card, so you can be notified if there are any major changes or suspicious account activity.
Make sure to review your transaction history on your credit and debit accounts often as well. You can even set alerts every time a charge appears on your account. This will help you spot identity theft and fraud as soon as it happens. Reporting such activity immediately can help you head off any damage to your credit score.
Sometimes, errors can dramatically impact your credit scores. Perhaps you paid off an account balance, but it’s not reflected in your report. Another error could be that a medical collection is showing but your insurance company had already paid it. A delinquent account that’s more than seven years old hasn’t fallen off your credit history yet is another example of something that can be disputed with the credit bureaus.
You have a right to challenge these errors. Each of the credit bureaus allows you to file a dispute through their website, and you can upload supporting documentation such as statements showing your last payment made.
The bureaus will then contact your creditor to verify your claim. If the creditor approves the claim, the bureau will remove the inaccurate or outdated information from your report. The dispute process generally takes up to 30 days.
If your credit score is low or you have a limited credit history, becoming an authorized user on someone else’s account may benefit you. As an authorized user, the primary cardholder’s history of on-time payments and their credit limit will affect your credit score.
If the primary account holder has always paid the account on time and they generally keep the balance quite low, this can work in your favor. But you only want to be added to an account if you know the person has strong personal finance skills and always pays their bills on time.
Being added to an account that has frequent late payments can drag your score down.
A rapid rescore is a request to one or more of the credit bureaus to recalculate your credit score within a matter of days. It can be used when a borrower is only a few points shy of qualifying for a loan or a better interest rate.
If you recently paid down significant debt and you want to buy a home, your lender might suggest a rapid rescore to help you qualify. It can take 30-45 days for the bureaus to update your score otherwise, so the rapid rescore option is necessary in some cases.
However, not all lenders offer rapid rescores. The process can cost up to several hundred dollars, depending on the request, and the expense falls entirely on the lender. They are legally forbidden from passing that cost onto borrowers.
But depending on your circumstances, they may decide it’s your best bet for qualifying for a loan or getting a significantly better interest rate.
If you’re not sure where your credit score stands or what your options are, your loan officer can pull your score and come up with a gameplan when you apply.
Perhaps one of the most common reasons people want a good credit score is to borrow money for a home. There are several different types of loans you can get for your home purchase.
Each loan program has its own requirements and lenders often add their own requirements, known as lender overlays. Your credit score determines the types of loan products you can get, as well as your interest rate.
Here are some of the baseline credit score requirements for different types of home loans:
- FHA Loan: 500 (with 10% down); 580 (with 3.5% down)
- VA Loan: 580
- USDA Loan: 640
- Conventional Loan: 620
If you have a limited credit history or do not have a traditional credit score, your lender may be able to use alternative forms of credit to approve you. The guidelines vary by loan product and lender, but you may be able to use the following forms of alternative credit:
There are more options than you might think when you’re buying a home, regardless of your credit score. A loan officer will help you figure out which loan programs you qualify for and which one is most affordable for you.
How do you get a strong credit score? The biggest steps you can take toward getting a good credit score are paying your bills on time and reducing your loan and credit card balances. On-time payments and credit utilization are the biggest factors in your credit score.
How can I raise my credit score quickly? The best way to increase your score quickly is to pay down your balances and make sure to pay all bills on time. If you can pay down a significant portion of your balances, you may be eligible for a rapid rescore (if your lender allows it), which triggers the credit bureaus to update your file based on your new balances.
If you have any collections on your credit report, it may be worth contacting them and asking if they will delete the account after payment is received.
How do I fix my credit score myself? Although there are services out there that can help you fix your credit score, just know they can be very expensive and may not be able to offer any guarantees. Working on your credit alone may be more time consuming but will save you money, which you can use to pay down debts and help you qualify for a home much sooner.
You can request copies of your credit score, pay bills, and dispute inaccurate or outdated information on your own. Making your payments on time and paying down, or paying off, your balances are the best things you can do for your credit score — and you can do them without guidance from anyone else.
Knowing how to get a good credit score comes down to practice and discipline. Focusing on the basics of on-time payments and keeping balances low will set you on the right path.
As you become more familiar with how credit works and take productive actions towards your financial goals, a better credit score will likely follow.
*Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
Fairway is not a registered or licensed credit management service provider. Please consult a credit counselor regarding your specific situation.
