Securing a favorable mortgage loan rate can save you thousands over the life of your loan, and your credit score plays a massive role in what lenders offer you. A higher score signals financial reliability, often translating to better terms.
If your score isn’t where you want it to be, there are practical steps you can take to improve it. Improving your credit score is about demonstrating responsible financial habits over time.
Check Your Credit Report
One of the first steps you should take to get a goof mortgage loan rate is to review your credit report from each of the major bureaus. These documents are detailed records of your credit history, and mistakes can happen.
An error, such as a payment incorrectly marked as late or an account that doesn’t belong to you, could be pulling your score down. You are entitled to free copies of your reports annually.
Look through each one carefully for any inaccuracies and dispute them immediately with the credit bureau. Correcting these errors can provide a quick boost to your score.
Pay Your Bills on Time
Your payment history is the most significant factor influencing your credit score. Lenders want to see a consistent track record of on-time payments, as it shows you can manage your financial obligations. A single late payment can remain on your credit report for years and negatively affect your score.
To avoid this, consider setting up automatic payments for your recurring bills. Another strategy is to create calendar reminders for due dates. Consistently paying on time demonstrates your reliability as a borrower.
Keep Credit Utilization Low
Credit utilization refers to the amount of revolving credit you are using compared to your total credit limit. A lower ratio is generally better for your score. For instance, if you have a credit card with a $10,000 limit and a $5,000 balance, your utilization is 50%.
Most experts recommend keeping this ratio below 30%. You can lower your utilization by paying down your balances or making payments throughout the month instead of waiting for the due date.
Diversify Your Credit Mix
Lenders like to see that you can responsibly manage different types of credit. This is known as your credit mix. Having a combination of revolving credit (like credit cards) and installment loans (like auto loans or personal loans) can positively impact your score.
If your credit history only consists of one type of account, consider responsibly adding another. For example, a small installment loan that you pay off on schedule can add positive diversity to your credit profile.
Avoid Opening Too Many New Accounts
While a diverse credit mix is helpful, opening several new credit accounts in a short period can be a red flag. Each time you apply for new credit, it typically results in a hard inquiry on your report, which can temporarily lower your score.
Additionally, new accounts lower the average age of your credit history, another factor in your score calculation. Open new accounts only when necessary and space out your applications over time.
Negotiate with Creditors
If you’re struggling to make payments, proactively communicating with your creditors is a wise move. Many lenders are willing to work with you to find a solution, such as a temporary forbearance or a modified payment plan.
Reaching an agreement can help you avoid missed payments, which would damage your credit score. This shows you are taking responsibility for your debt and can prevent your accounts from going into collections.
