7 Ways To Improve Your Credit Score To Buy A Home

A good credit score is one of the most critical elements to help you qualify for a mortgage with the lowest interest rate possible. This is because lenders factor in your credit score to determine how likely you are to repay a loan when you buy a house. 

A favorable credit score ranges roughly between 700-800, and an excellent credit score ranges between 800-850. If you increase your credit score by even 50 points, you might qualify for a lower interest rate on your home mortgage. 

A 1% or 0.5% decrease in your mortgage’s interest rate can actually save you tens of thousands of dollars or more over the term of a 30-year mortgage.

Below, the team at Prevu Real Estate has compiled some expert tips you can take to achieve a higher credit score if you are planning to buy a home.

Steps to improve your credit score

• Pay your monthly bills on time
• Strategically reduce your debt
• Maintain a low credit utilization
• Increase your credit limits
• Transfer credit to a 0% interest rate card
• Have yourself added as an authorized user
• Get errors removed from your credit report

Pay your monthly bills on time

Paying your bills, car payments, and other loans in a timely manner is vital for maintaining a good credit score. It helps build a history of on-time payments and shows that you can be trusted to pay bills steadily and handle revolving credit over an extended period.

Even if you only make the minimum payment required, it demonstrates a consistent payment history. This may not lower your overall debt, but it positively affects your credit score. 

Setting up automatic payments for the minimum amount can help with this. If you want to pay more than the minimum, you obviously can. But, auto-paying the minimum removes the burden of remembering on your own. 

Strategically reduce your debt

Reducing the amount of debt you owe will improve your credit score. This is because you will prove to lenders that you are a dependable borrower. 

Even if you don’t pay off your entire credit card balance, lowering the balance will most likely improve your score. If possible, reduce the balance you owe to 30% or less of your card’s limit.

Similarly, paying down debt on installment loans, such as an automobile or personal loan, can help your credit score. If you don’t pay off the entire thing, that’s ok! 

In fact, having various lines of credit open shows lenders that you can responsibly manage multiple debts at once. 

Maintain a low credit utilization

Your credit utilization is the portion of your credit limit that you actually spend. The recommended percentage is about 30% of your available credit or less. 

For example, if your credit card’s limit is $10,000, it’s best only to use $3,000. 

Ultimately, having a credit utilization number in the single digits is ideal. It’s hard to pinpoint an exact number, but a number between 1-7% credit utilization would look most appealing on your credit score. 

Increase your credit limits

Once you’ve successfully paid off a good portion of your debt, it may be safe to ask your credit card holder to increase your credit limit. 

This will automatically lower your credit utilization and improve your credit score.

For example, if you owe $3,000 on a card with a limit of $10,000, your credit utilization is 30%. 

If your credit limit is raised to $15,000, your credit utilization drops to 20% without you actually paying off any debt!

Transfer credit to a 0% interest rate card

You’ve probably seen offers allowing you to open new credit cards with 0% interest rates for 12-21 months. Transferring some of your debt to one of these cards can help in a few ways. 

Firstly, it will help you pay off the principal part of the debt more quickly, rather than just chipping away at interest. 

Secondly, transferring part of your debt to a new card can lower your credit utilization percentage. 

For example, if you have $5,000 of debt on a card with a $10,000 limit, your credit utilization is 50%. If you transfer $2,000 of debt to a new card with a similar limit, you will lower your credit utilization on the original card to the recommended 30%. 

Thirdly, having several credit card accounts can raise your credit score because you will diversify your credit profile. But it’s always good to make sure you only have as many credit cards as you can manage responsibly. 

Have yourself added as an authorized user

Another way to build credit is to have yourself added as an authorized user on another person’s credit card. 

The average age for first-time home buyers is around 33 years old, which may be too young for some folks to have built a decent credit history. So, if you’re looking for a quick way to boost your credit, you may be able to piggyback on someone else’s good credit score. For example, some parents add their children as authorized users even if they don't plan to use the card regularly.

Get errors removed from your credit report

There may be false information on your credit report, negatively impacting your score. Some common mistakes are on-time payments mistakenly reported as late, and incorrect credit limits or loan balances. 

If your score seems lower than you expect, cross-check the balances on your credit report for errors listed by your creditors. 

Lenders rely on the FICO and VantageScore credit scoring models to gather information about your credit history from the three major credit bureaus; Equifax, Experian, and TransUnion. Be sure to take the proper steps to have the errors removed from all three.