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Get on track to improving your credit

Fact: Your credit score is the most important factor when it comes to getting approved for a mortgage. Why? It helps mortgage lenders see that you’re responsible at managing credit and paying a loan on time. A good credit score is also important for you because it affects the interest rate you can get on a loan. Even if you get approved with a low score, you’re likely to have a higher interest rate. To get the best rate possible, you should aim to have a FICO score of 760 or above.* Most people spend years building up their credit and proving they’re capable of paying their bills in full and on time. You can’t improve your credit score overnight, but it can happen in a few months with these steps.

Get on track to improving your credit

1. Figure out your credit score.

Now that you know the importance of having a good credit score, find yours out if you don’t already know it. You’re entitled to one free copy of your credit report per year. To request yours, visit a trusted site like www.annualcreditreport.com.

After getting your number, compare it to the chart below. Although lenders might create their own range of what’s considered “excellent” and “fair,” this is typically how credit scores are ranked:

  • Perfect credit score: 850
  • Excellent credit score: 740 and higher
  • Average credit score: 680-739
  • Fair credit score: 620-679
  • Poor credit score: 580-619
  • Bad credit score: 500-579 

2. Examine your credit report.

After you have your number, take a look at the report as a whole. You might even find errors on your report that you can flag to the credit bureau and have fixed. For example, finding a late payment inaccuracy can potentially raise your score by 40 points. It’s important to make sure any disputes are resolved before applying for a home loan so you have your most accurate number available.

3. Take a look at your credit card payments.

A high balance on your credit cards equals a lower credit score. The fastest way to improve your credit score is by paying off any debt on your current cards.

  • Start making consistent payments.

Start making your payments on time if you haven’t been. In fact, payment history has the biggest impact on your credit score. Although this won’t improve your credit as immediately as you might like, it will pay off in the long run

4. Aim to stay under your credit limit.

Just because you have a high amount of credit available doesn’t mean you should max it out. When you get close to your credit limit or max out your cards, lenders interpret this as unmanageable spending habits. The rule of thumb is to keep your balance below 30 percent of your credit limit across all of your cards (also known as your “credit utilization ratio”).

To help maintain a low balance, you can try making small payments throughout the month or even make an early payment. This will make sure the balance is as low as possible when it gets reported to the credit card bureaus. You can also look into getting a higher credit limit—assuming you don’t spend more than what you’re currently spending—to maximize your credit utilization ratio.

5. Don’t open new credit cards or close existing ones.

Now is also not the time to open any new credit cards or close any existing accounts. If you try to open a new account and get denied, that’s another way your credit score would lower. Don’t worry if you currently have a few accounts open. As long as these cards aren’t carrying a huge balance, it can actually show lenders that you’re responsible at handling your credit.

6. Consider becoming an authorized user.

Another quick way to improve your credit score is by becoming an authorized user on someone else’s account. Do you have a trustworthy friend or relative who has a good credit score and makes their payments on time? Their positive credit history can give your credit report a boost if they add you as an authorized user. You won’t even have to physically use their account for the new credit to be reflected.

7. Plan for the future.

Even if you don’t plan to buy a home for a few years, now’s a great time to get on track to build an excellent credit score for future loans. Make your payments on time for at least 12 months to build your credit back up. If you’re forgetful, consider setting up automatic payment to take the stress out of it. Continue to be cautious about opening too many credit cards in a short amount of time. Once you feel like your spending is under control and you’re virtually debt-free, take the next step toward researching mortgage lenders and getting that loan.

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