How to Improve Your Credit Score Before Buying a House

Ah, the almighty credit score. The three little numbers that make a big difference in whether you can apply for a mortgage loan and at which rate. The higher your credit score the lower your mortgage rate, which in turn saves you a lot of money throughout the life of the loan. Does your credit score have to be perfect? No. Do you want it to be the best it can be? Yes. Here are seven things you should do to bolster your credit score in advance of a home purchase.

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1. BE PROACTIVE & GIVE YOURSELF TIME

Ideally you should start the process of going through and repairing your credit well before you apply for a mortgage. Give yourself at least three to six months for minor credit repair. If you have significant credit issues, you’ll likely need at least a year to see significant changes. Improving your credit score takes some time. It can be weeks, or even months, for your score to reflect any positive changes you make. Don’t expect that you can repair your credit overnight. Give yourself adequate time to complete this important step in the homebuying process.

2. LOOK AT YOUR CREDIT REPORTS

You’re entitled to pull your credit report from each of the three major credit bureaus for free once per year. Use them! You can get your free credit reports at AnnualCreditReport.com, a government-run site. The three major credit bureaus you’ll find on most credit reports are Experian, TransUnion and Equifax. Credit scores range from 300 to 850 and provide an overall measure of your track record for managing and paying off debts. The debts affecting your credit score can include credit cards, car loans, student loans, medical bills, and personal loans, among others. A strong credit score—typically anything 700 or over—shows that you pay your bills on time each month, and that you’re unlikely to default on your payments.

3. DISPUTE AND CORRECT ANY ERRORS

Now’s the time to go through your credit report with a fine tooth comb and focus on the things that are bringing your credit score down. Review each of your three reports line by line. Verify that all the information is correct, and highlight any accounts or line items that are negative or inaccurate. These are your areas for improvement. Credit report errors are very common and these errors can affect your ability to get a mortgage, and can hurt your rate too. The good news is you have recourse. Every consumer is entitled to dispute an error on their credit report. Both creditors and credit reporting agencies are required by law to correct your report if an error is found.

4. SETTLE DEBTS IN COLLECTION

If you have outstanding debts that have gone into collections, they could be bringing your score down significantly. Now is the time to settle them. Call the collection agency and tell them you want to “pay to delete” the debt. What this means is that you’ll pay what you owe on the account and they’ll delete the negative item from your credit report. You can often negotiate the amount you owe to a collector, but always confirm that they will in fact delete the negative account from your credit reports before coming to an agreement. Keep a written record of your conversation: the date, who you spoke with, their contact information, etc.

5. PAY DOWN BALANCES

Do you have credit card balances you’ve been meaning to pay down—or better yet—pay off? Now is the time. You should free up any available credit where you are able. Experts suggest keeping your utilization below 30% to protect your credit score. In other words, you should be using less than 30% of your available credit. Think of this step as freeing up room in your financial profile for your home loan. This can improve your score dramatically and quickly.

6. AVOID ADDITIONAL DEBT

During the period when you’re preparing to buy a home, and even while you’re going through the process of taking out a mortgage, it’s imperative that you avoid taking on any further debt. Opening up new debt accounts (for example: taking out a car loan) will negatively impact your credit score. So it’s important to wait until after you’ve closed on your home to consider taking on a new loan. Even if you’ve already been approved for a mortgage, hold off any new debt. Mortgage lenders monitor your credit throughout the entire process, which takes on average 45 days. Any changes during that time can interfere with your financing. Don’t risk it!

7. DON’T CLOSE OUT ACCOUNTS

Finally, it’s best not to close any credit accounts while you’re applying for a mortgage. There is a lot of debate over whether closing unused accounts hurts your credit. But given the fact that your score partly looks at your mix of credit and length of credit history, it’s probably best not to mess with anything so close to taking out a home loan. Keeping the account open but inactive shouldn’t hurt your credit, but closing an account so close to applying for a mortgage might cause concern on the lender’s part. If you really want to close the account, wait until after you’ve closed on your new home and it’s a done deal.

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