How Can I Improve My Credit Scores and Get the Best Possible Mortgage Deal?
Your credit scores are one of the most important factors that impact the interest rate and closing costs you’ll pay for a mortgage. Mortgage lenders consider your scores to be highly predictive of the likelihood you’ll default on a mortgage, so they’re given a lot of weight in the loan qualifying and approval process. The higher your credit scores, the better the deal you’re likely to get.
Mortgage lenders pull credit data from the three major credit bureaus: Equifax, Experian, and TransUnion. The information they obtain contains credit scores and payment histories for mortgages, auto loans, personal loans, and credit cards. Your credit file also contains any derogatory credit items such as collections, foreclosures, judgments, charge offs, and bankruptcies.
For mortgage qualifying purposes, scores above 720 are considered “good” credit and scores below 620 are “bad” credit. Everything in between is considered “fair” credit. To get the best mortgage deals available, your scores need to be at least 740 or higher.
How to Improve Your Credit Scores
If your scores are a little low, here’s some ways you can improve and keep them strong:
- Pay all payments on time without fail. Payment history is by far the most important component of the credit score calculation. It’s essential you pay on time if you want your credit scores to improve. Make sure you mail the payments at least a week in advance of the due date so they’re processed and posted before the due date. If you pay online, pay it at least a few days in advance – not at the last minute, which means it may not post until the next day.
- Clear up any derogatory credit items. If you have any old accounts that have been sent to collection or charge off status, get them cleared up as soon as possible. Even if they’re old or the amount owed is relatively low, they can still damage your scores. You may be able to negotiate a reduced payoff with the creditor, but make sure to get any agreement in writing.
- Keep your credit card balances below 30% of the limit. The credit bureaus hit your scores hard if you have a high balance to limit ratio, even if you make your payments on time. If your credit cards are maxed (or beyond maxed), your scores will get hit even harder.
- Keep older credit card accounts open. If you’re closing out accounts, make sure to keep your oldest credit card accounts open. Long credit histories are very good for credit scores.
- Don’t cosign. If you cosign, you’re legally obligated for the debt as well. If the other person stops paying, your credit scores will take a serious hit and the bank will come after you for the payments. Cosigning is generally a bad idea because you’re putting your credit reputation in the hands of somebody else.
Keep in mind that collections and charge-offs will remain on your credit report for 7 years even if the balance is paid in full. Bankruptcies stay in your credit file for 10 years.
Check Your Credit Periodically
Be sure to check your credit report periodically to make sure there are no mistakes that can damage your scores. Federal law entitles you to one free credit report each year from the following official website:
If you do find any mistakes or derogatory accounts, be sure to get them corrected as soon as possible. You’ll need to work directly with the credit bureau that is reporting the derogatory account.