Having a high credit score is critical for getting a low-interest rate on your mortgage. Here's what you need to know about improving your credit score. 

What is a credit score?

It helps to start with the basics. Your credit score is a number that represents your credit history based on a mathematical calculation of your ability to repay your credit. Lenders use your credit score as part of the process to determine your qualification for a loan/mortgage. Landlords usually check your credit score when you apply for a lease. A popular credit company is Fair, Isaac & Company (FICO).

It would help if you had a good credit score to qualify for a mortgage with a reasonable interest rate. If you have a low credit score, you can probably still get a loan, but the interest rate will likely be unfavorable. Low-interest rates are critical for keeping your payments and overall price of the home at a minimum. So, an excellent way to get the best value for your home purchase is to have a great credit score!

What goes into calculating my credit score?

Your credit score is an algorithm that includes many different variables. To put it simply, here is a list of the percentage breakdown for how creditors determine your credit score: 

• Payment History: 35%
• Amount Owed: 30%
• Length of Credit History: 15%
• New Credit: 10%
• Type of Credit Used: 10% 

Payment History

Payment history is the highest weighted category in the calculation. So, if you fail to make payments on time, chances are your credit score is unfavorable. Credit scores are fluid, which means you can improve them over time. Consistently making payments on time is the best way to improve your credit score.

Amount Owed

Another significant component is the amount of credit you owe at the time a lender runs your credit. This is similar to your debt to income ratio (DTI). If you owe too much already, this can hurt your credit score. Mortgage lenders want to know that you can afford to pay off their loans. If you already have several loans for cars, another house, or massive credit card debt, this can negatively impact your credit score. 

The final three categories have less influence, but can still nudge your score in the right direction. The sooner you can start contributing to your credit score, the better. Credit companies take into consideration how long you have had a credit line, and what types of credit you use (i.e., credit cards, car loan, mortgage, etc.)

What can help my credit score? 

Whether you have a low credit score or a conservative spender who wants to have the best score possible, there are several ways you can improve your credit score. The quickest way to up your credit score is to pay off any outstanding debt.

Pay off your outstanding debt

It's easier said than done, but the best way to boost your credit score to get approved for a loan is to reduce the current amount owed. The two most influential aspects of your credit score are payment history and amount owed. This tells us that the less debt you have, the more likely a lender will approve your loan. If you're looking to spike your credit score quickly, throw as much money at your debts as possible.  

Watch your score

It's also essential to keep a close eye on your credit score over time. Of course, if you're reading this blog, you probably have already checked. We suggest checking your credit score yearly to make sure nothing looks out of line. Creditors are human, and they make mistakes. It would be unfortunate if you got turned down for a loan because of an error that's out of your control. If something looks odd, talk to a lender about your options or how you can get the false information removed from your record. Don't check your credit score too often, as it may hurt your score. However, once a year is a good rule of thumb. 

Visit any of these links to check your credit score. You'll need to provide a report from one of these three major credit unions to apply for a mortgage. The scores may vary slightly. 

• Equifax 800-685-1111 or equifax.com
• Experian 888-397-3742 or experian.com
• TransUnion 800-888-4213 or transunion.com

What can hurt my credit score? 

There are only a few things you can DO to improve your credit score. It's also important to know what to avoid, so you don't hurt the hard work you've done to get a solid credit score. Unfortunately, keeping a good credit score takes time. Unless you can pay off a lot of debt at one time, you should pay attention to what things you should avoid, so you don't make it worse. 

Don't activate more credit cards

If you don't have a good credit score, you probably shouldn't tempt yourself to borrow more money. Also, your credit score considers how many credit lines you have open. So, even activating a credit card, whether you use it or not, can hurt your credit. 

Try not to "max out" your existing credit cards. As mentioned above, lenders consider your debt. Using your entire credit line can accumulate a lot of interest if you can't pay it back quickly. Do your best to keep up with your current credit cards and focus on paying off the credit you've already used. 

Some people think that closing a credit line will help their score. Closing a credit line negatively impacts your credit. Any activity, even if it's meant to eliminate the temptation to use a card, will hurt your score. If you've paid off a card and don't intend to use it, store it in a safe place so no one can steal your personal information. You must have a credit history to get a loan, but you can't close a credit line either. Weird, right? 

Try to avoid co-signing

If you co-sign for someone's loan, you are held equally responsible for the payments. If they miss a payment, it impacts your credit score as well. Chances are if they need a co-signer, it's probably because they either don't have adequate income to get the loan by themselves, or they have a poor payment history. Try not to get involved in any unnecessary risks, especially if you plan to apply for a mortgage soon.  

Need help? 

Talk to a mortgage professional HERE if you need help improving your credit score.