How to Improve Your Credit Score Before Applying for a Mortgage

When you’re preparing to buy a home, your credit score is one of the most important factors that lenders will consider when deciding whether to approve your mortgage application and what interest rate to offer. A higher credit score can mean lower interest rates, saving you thousands of dollars over the life of your loan. On the flip side, a lower score could lead to higher rates, or even disqualify you from obtaining a mortgage altogether.

If you’re planning to apply for a mortgage soon, it’s crucial to focus on improving your credit score. But how can you do that? Below are actionable steps to help boost your credit score before you apply for a mortgage.

1. Check Your Credit Reports for Errors

One of the first things you should do is request a free copy of your credit report from the three major credit bureaus: Equifax, Experian, and TransUnion. You’re entitled to one free report from each bureau per year through AnnualCreditReport.com.

Once you have your reports, go through them carefully to check for any inaccuracies, such as incorrect account information, missed payments that were actually paid on time, or accounts that don’t belong to you. If you find any errors, dispute them with the credit bureau to have them corrected. Even a small mistake can negatively impact your score, so it’s worth checking for accuracy.

2. Pay Your Bills on Time

Payment history makes up about 35% of your FICO score, so making your payments on time is one of the most important ways to improve your score. Late payments—especially those that are more than 30 days overdue—can significantly damage your credit.

If you’ve missed payments in the past, try to bring your accounts current as quickly as possible. Setting up reminders or automatic payments can help you stay on track. Over time, a consistent record of on-time payments will gradually boost your credit score.

3. Reduce Your Credit Card Balances

Credit utilization (the ratio of your credit card balances to your credit limits) makes up about 30% of your credit score. Ideally, you want to keep your credit utilization under 30%, and even lower is better. For example, if you have a credit card with a $5,000 limit, try to keep your balance below $1,500.

If you have high credit card balances, paying them down can significantly improve your score. Focus on paying off the cards with the highest interest rates first, but be sure to make at least the minimum payments on all of your cards to avoid late fees and additional penalties.

4. Avoid Opening New Credit Accounts

Each time you apply for new credit, whether it’s a credit card or a loan, a hard inquiry is made on your credit report. Too many hard inquiries in a short period can signal to lenders that you may be taking on more debt than you can handle, which can lower your credit score.

If you’re planning to apply for a mortgage soon, avoid opening new credit accounts in the months leading up to your application. This will help ensure that your credit report stays as clean as possible.

5. Keep Older Accounts Open

The length of your credit history accounts for about 15% of your FICO score. The longer your accounts have been open, the better it is for your score. Closing old accounts, especially ones with a long history of on-time payments, can hurt your credit score by shortening your credit history and potentially increasing your credit utilization.

If you’re tempted to close a credit card you no longer use, consider keeping it open—especially if it’s one of your oldest accounts. Just be sure to avoid accruing fees or overspending on the card.

6. Consider a Credit Builder Loan

If you have a limited credit history or are trying to rebuild your credit after a financial setback, a credit builder loan could be a useful tool. These loans are designed to help individuals build or improve their credit scores. With a credit builder loan, the money you borrow is held in a bank account while you make regular payments. Once the loan is paid off, the lender releases the funds to you, and your on-time payments are reported to the credit bureaus, which can help improve your score.

7. Settle Any Past Due Accounts

If you have any past-due accounts, such as collections or charged-off accounts, it’s a good idea to settle them before applying for a mortgage. Some lenders may be willing to negotiate a settlement for less than the full amount owed, but the key is to get the agreement in writing before making any payments.

Settling past-due accounts can help improve your credit score over time, but it’s essential to ensure that the lender or collection agency reports the account as “settled” or “paid in full” to the credit bureaus.

8. Become an Authorized User

If you have a close family member or friend with a strong credit history, you might consider asking them to add you as an authorized user on one of their credit cards. Being added as an authorized user can increase your credit score by adding their positive payment history to your credit report.

Before pursuing this option, be sure that the primary cardholder has a strong payment history, as their account activity will directly affect your credit score.

9. Monitor Your Progress

Improving your credit score takes time, and it’s important to track your progress. Many credit monitoring services offer free tools to keep an eye on your score and alert you to changes or updates. Regularly checking your credit score can help you see how your efforts are paying off and identify any further improvements you need to make.

The Impact of a Good Credit Score on Mortgage Rates

Your credit score plays a huge role in the mortgage process. The higher your score, the more favorable the terms of your mortgage will likely be. With a higher credit score, lenders see you as less risky, and they may offer you lower interest rates. Over time, this can translate to thousands of dollars in savings.

For example, a borrower with a score of 760 or higher might qualify for the best mortgage rates, while someone with a score below 620 might struggle to qualify or face significantly higher rates. Even small improvements in your credit score can help you secure a more favorable loan.

Conclusion

Improving your credit score before applying for a mortgage can make a significant difference in the rates and terms you’re offered. By taking steps to clean up your credit report, paying bills on time, reducing debt, and avoiding new credit applications, you can boost your score and improve your chances of securing the best mortgage deal possible.

The sooner you start working on your credit, the better prepared you’ll be when it’s time to apply for your mortgage. Start today, and you’ll be well on your way to a smoother, more affordable homebuying experience.