Boosting your credit score before applying for a loan, especially a significant one like a mortgage, can have a substantial impact on your approval odds and the interest rate you receive. A higher score signals to lenders that you are a lower credit risk, potentially saving you thousands of dollars over the life of the loan.
Here's how you can work on boosting your credit score:
Get Your Credit Reports and Scores:
- Access Free Reports: You're entitled to a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once every 12 months via AnnualCreditReport.com.
- Review for Accuracy: Carefully examine each report for any errors, such as incorrect personal information, accounts that aren't yours, or inaccurate payment statuses. Even small mistakes can negatively impact your score.
- Dispute Errors: If you find errors, dispute them immediately with the credit bureau and the creditor.4 Provide documentation to support your claim.
Prioritize Payment History (Most Important Factor):
- Pay All Bills On Time, Every Time: This is the single most crucial factor (35% of your FICO Score). Late payments, even by a few days, can severely damage your score and stay on your report for up to seven years.
- Set Up Reminders/Autopay: Use calendar alerts, set up automatic payments for at least the minimum due, or integrate payment reminders through your bank or credit card's online portal to ensure you never miss a due date.
- Catch Up on Past-Due Accounts: If you have any overdue accounts, get them current as quickly as possible. The longer an account is delinquent, the more it hurts your score.
Reduce Your Credit Utilization (Second Most Important Factor):
- Keep Balances Low: Your credit utilization ratio (how much credit you're using compared to your total available credit) accounts for 30% of your FICO Score. Aim to keep this ratio below 30% on all your revolving credit accounts (like credit cards), but ideally, keep it as low as possible, even in the single digits.
- Pay Down High-Balance Cards First: If you have credit cards with high balances, focus on paying them down strategically.
- Make Multiple Payments: Instead of waiting for your statement due date, consider making smaller payments throughout the month, especially if you use your cards frequently. This can keep your reported balance low.
- Request a Credit Limit Increase: If your financial situation has improved and you have a good payment history, you can ask your credit card issuer for a higher credit limit.9 If approved, and you don't increase your spending, this will immediately lower your utilization ratio. Be aware that this might result in a "hard inquiry" which can slightly dip your score temporarily.
Manage Your Credit Mix and Length of Credit History:
- Keep Older Accounts Open: The length of your credit history (15% of your FICO Score) is influenced by the age of your oldest account and the average age of all your accounts.10 Resist the urge to close old credit cards, even if you don't use them, as this can shorten your credit history and increase your utilization ratio.
- Diversify Your Credit (Naturally): While it's generally not advisable to open new accounts just to diversify your credit mix, having a mix of revolving credit (credit cards) and installment loans (auto loans, student loans, mortgage) can be beneficial over time if managed responsibly.
Be Cautious with New Credit Applications:
- Limit Hard Inquiries: Each time you apply for new credit, a "hard inquiry" is placed on your credit report, which can slightly lower your score (10% of FICO Score). Avoid applying for multiple new credit cards or loans in a short period, especially in the months leading up to a major loan application.
- Rate Shopping for Loans: For mortgages, auto loans, or student loans, multiple inquiries within a short timeframe (typically 14-45 days, depending on the scoring model) are often counted as a single inquiry, allowing you to shop for the best rates without significant negative impact.
Consider Other Strategies:
- Become an Authorized User: If you have a trusted friend or family member with excellent credit and a long, positive payment history, they might add you as an authorized user on one of their credit cards. Their good payment history could then reflect positively on your report. Ensure they have a low credit utilization rate and you trust them implicitly, as their financial behavior will impact you.
- Experian Boost/UltraFICO: Services like Experian Boost allow you to get credit for on-time payments of bills not traditionally reported to credit bureaus, such as utility payments, cell phone bills, and streaming subscriptions. UltraFICO considers checking and savings account information.16 These can be helpful for those with limited credit history.
- Secured Credit Cards: If you have poor or no credit, a secured credit card can be a good way to build or rebuild your credit. You put down a cash deposit, which becomes your credit limit, and then use the card responsibly.
- Credit-Builder Loans: Offered by some credit unions and community banks, these loans are designed specifically to help you build credit. The loan amount is typically held in a savings account while you make regular payments, which are reported to the credit bureaus.
Important Considerations:
- Time: Building credit takes time and consistent effort. Don't expect dramatic changes overnight. Start these strategies as early as possible before applying for a loan.
- Debt-to-Income (DTI) Ratio: While not part of your credit score, lenders also heavily consider your DTI ratio (your total monthly debt payments divided by your gross monthly income) for loan approval. Paying down debt helps both your credit score and your DTI.
- Stay Consistent: The key to a healthy credit score is consistent, responsible financial behavior over time.
Read about ways to improve your credit
