How to Increase Your Credit Score for a Lower Interest Rate

Mortgage interest rates are continuing to be at historic lows, but if you want to be able to take advantage of these low rates you will want to make sure you have a great credit score. Your credit score is a large determining factor in the type of mortgage you will qualify for as well as the exact interest rate you will be offered by a lender. Your credit score can also determine the required down payment on a loan and this can make a huge difference in how much home you can afford in today’s market.

Credit scores range from 300 to 850, a good score is considered to be between 670 and 739. Very good credit scores are considered to be between the numbers of 740 and 799, an excellent credit score is anything above 800. These numbers are set by FICO a leading credit scoring company in the country. According to the federal reserve bank of New York homeowners who took out mortgages in the fourth quarter of 2020 had a median score of 786. Of course, consumers with the highest scores are receiving the lowest interest rate offers from lenders.

Here are some ways that you can increase your credit score before applying for a mortgage to help secure a lower mortgage interest rate.

Take a look at your credit history report

Every consumer is allowed one free credit history report a year from the three main credit scoring companies which are Experian, Equifax, and Trans Union. You can contact these companies directly or access your credit report through the annualcreditreport.com website.

When you receive your report you should make a note of your score as well as every detail reported on your report to make sure that things have been recorded properly. It is not uncommon for there to be a negative report that has been reported incorrectly on a person’s credit history. If you find there has been a negative report recorded on your credit mistakenly it is within your right to ask that it be corrected so that it will no longer make a negative impact on your credit score.

Lessen the credit utilization ratio

Lenders will look at whether you have a high balance on your current credit cards. Even if you pay the full expected amount each month on time the amount of credit you have used compared to the limit on your card will make an impact on your mortgage interest. So say if you have a credit card at a $5000 limit and you are borrowing $3000 on the card this is 60% of the available credit in use. Lenders would like to see your credit cards below 30% usage and would love to see a usage of 10% or below. You can help knock the balance down before the statement comes off by making an extra payment in the middle of the billing cycle.

Pay bills on time

Even one late or missed payment can knock your credit score down significantly. Some financial experts advise the easiest way to avoid late and missed payments is to set up automated payments for credit card bills.

Look into a credit builder loan

Some smaller community banks and credit unions will offer credit building loans which are designed to help a person build their credit score as they make payments. This does include paying interest but some lenders may reimburse the cost after the loan is completely paid.

Become an authorized user on a credit card

If you have no or very limited credit history a good way to start building your history is to become an authorized user on someone else’s credit card. You want to make sure that you become an authorized user on a credit card of someone who has a good credit score though. This credit account has to stay in good standing in order for it to make a positive impact on your credit history.

Alternative credit scoring

In some cases, you can ask for alternative solutions to look into your reliability of payment history. For example, Experian boost can bring up your score on Experian by counting phone, utility, streaming service bills, and other monthly payments you are making. One thing to be aware of though is that government-backed mortgages will not allow this to be used as a means of finding reliability and credit history.

Keep other major purchases on hold

If you are hoping to apply for a mortgage loan in the near future you will want to put a pause on all other big-ticket item purchases like a car or opening up a new credit account until your mortgage has been approved.

For more information on purchasing a home in Dayton or surrounding areas of Ohio please contact us anytime.