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7 Tips to Improve Your Credit Score (FICO Score) for a Home Loan or Mortgage

The revamped regulations in the lending industry have made getting a mortgage more challenging than ever. The bright side of the new rules is that it is much harder to qualify for a property you cannot afford. The downside is that you have much stricter guidelines to follow in order to be approved for a mortgage. Credit scores, in particular, are much more important than they used to be.

What Is a Credit Score (FICO Score)?

Your credit score, often called a FICO score, is a numerical representation of your creditworthiness. It’s a tool lenders use to assess your lending risk. Scores typically range from 300 to 850, with higher scores indicating better creditworthiness. Factors such as payment history, credit utilization, length of credit history, types of credit, and new credit inquiries influence your score.

How Is Your Credit Score (FICO Score) Calculated?

Credit scores are based on various factors, each carrying different weights. Payment history accounts for the most significant portion, followed by amounts owed, length of credit history, new credit, and types of credit used. Late payments, high credit card balances, and recent credit inquiries can lower your score, while timely payments, low balances, and a diverse credit mix can boost it.

Tips for Raising Your Credit Score

Improving your credit score is essential for securing favorable terms on a home loan or mortgage. Follow these expert tips to enhance your creditworthiness and increase your chances of loan approval.

1. Check your credit report regularly.

Regularly monitoring your credit report allows you to identify errors, inaccuracies, or fraudulent activities that could negatively impact your credit score. Obtain free copies of your credit report from the major credit bureaus—Equifax, Experian, and TransUnion—and review them for any discrepancies. Dispute any errors promptly to ensure your credit information remains accurate.

2. Add to your credit mix.

A diverse credit mix, including revolving credit accounts (credit cards) and installment loans (auto loans or student loans), demonstrates responsible credit management. If you lack variety in your credit accounts, consider adding new types of credit to your portfolio to (possibly) improve your credit mix and boost your score.

3. Pay off delinquent accounts.

Delinquent accounts, such as past-due loans or accounts in collections, can significantly damage your credit score. Develop a plan to pay off these accounts as soon as possible to minimize their negative impact on your creditworthiness. Negotiate payment arrangements or settlements with creditors if necessary, and strive to bring all delinquent accounts current to improve your credit score.

4. Make payments on time.

On-time payment history is one of the most critical factors influencing your credit score. Ensure you consistently make payments by their due dates to demonstrate responsible credit management. Set up automatic payments or reminders to help you stay organized and avoid missed payments. Even one late payment can harm your credit score, so prioritize timely payments to maintain or improve your creditworthiness.

5. Avoid new debt.

Taking on new debt can temporarily lower your credit score and increase your debt-to-income ratio, hindering your ability to qualify for a mortgage. Avoid opening new credit accounts or taking out loans before applying for a home loan to prevent unnecessary fluctuations in your credit score. Focus on reducing existing debt and improving your credit utilization ratio instead.

6. Keep low balances.

High credit card balances relative to your credit limits can negatively impact your credit score. Aim to keep your credit card balances low compared to your available credit to demonstrate responsible credit usage. Pay down outstanding balances regularly and avoid maxing out your credit cards, as high utilization rates can signal financial instability to lenders and lower your credit score.

7. Ask for higher credit limits.

Increasing your credit limits can potentially lower your credit utilization ratio, which is the amount of credit you’re using compared to your total available credit. Contact your credit card issuers and request higher credit limits, especially if you have a history of responsible credit management. Keep in mind that this strategy may not be suitable for everyone and could result in increased temptation to overspend if not managed responsibly.

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