The list of things to do as you prepare to purchase a new home can seem long and arduous, but none may be as important as consistent credit monitoring and taking steps to improve your credit score, if necessary. Your credit score can impact all aspects of your financial well-being, including whether a lender will approve your mortgage loan application, the terms you are offered, and the interest rate you will pay.
A few points added to your credit score can potentially save you thousands of dollars in interest payments over the life of the loan. Your credit score is compiled from information about you, your bill-paying history, number and type of accounts that you have, the amount of outstanding debt that you have, and the age of your credit history and accounts. A statistical program then compares your data to the loan repayment history of consumers with similar profiles to help predict how credit-worthy you are and how likely it is that you will repay a loan and make the payments when they’re due.
Because credit scoring relies on so many factors, there are also a number of ways in which you can improve your credit score:
- Pay on time – Your payment history significantly affects your credit score. If you regularly pay your bills late, have had an account referred to a collections agency, or have declared bankruptcy in the past, it will negatively impact your credit score. If you do consistently pay on-time, but have one late payment on your history, you may be able to request that the creditor delete it from your account as a one-time courtesy.
- Limit your debt – Your credit score depends on how much debt you carry, compared to your available credit limits. A mix of different types of debt—credit cards, loans, and other forms of credit—can positively impact your score, but be careful not to overextend yourself.
- Build your credit history – While you may think that getting rid of paid-off or unused credit cards is a good way to boost your credit score, it could actually have a negative impact. Your credit score reflects the length of your credit history, so closing old accounts actually shortens your history and affects your score negatively.
- Limit new credit applications – Your credit score can be damaged if you apply for too many new accounts in a short period of time. Credit agencies are constantly monitoring your activity, so you might want to pass on the credit cards that promise cashback or offer a sign-on bonus for applying.
- Review your credit report annually – Federal law entitles individuals to review their credit report annually at no cost by visiting annualcreditreport.com. Take this opportunity to review your report, look for discrepancies and errors, and report anything found to the agency for correction.
For more tips on preparing to purchase your new home, contact our exceptional team of licensed mortgage professionals today.