Increasing Your Fico Score For A Better Mortgage Deal

A good credit score is crucial for your personal finances and your ability to become a homeowner. Your FICO score is one of the first things you should look at when getting your financial affairs in order to buy a home. Lenders use your FICO score to determine your credit risk or ability to repay a loan. The higher your credit score, the better your chances of being approved for a mortgage and the lower your mortgage rate will be. Here are some tips to improve your credit score before applying for a mortgage.

How to increase your mortgage FICO score

Pay off credit card debt

Paying off credit card debt is an effective way to improve your FICO score. Credit utilization, or the balance-to-limit ratio, measures how much money you owe creditors compared to your total available credit limit. This ratio accounts for 30% of your credit score. The lower the ratio, the better it is for your score.

For example, if you have a $2,000 balance on your credit cards but a $10,000 credit limit, your credit utilization ratio is 20%. Lenders view a lower credit utilization rate as positive because it indicates that you can obtain and manage different kinds of debt.

To improve your credit utilization ratio, pay off debts, especially those close to maxing out. You can also increase your credit limits on card accounts, which will help improve your credit utilization ratio. It is recommended to keep your debt utilization ratio under 30% to receive the best FICO mortgage rates.

While paying off credit card debt is essential, it is also crucial to avoid closing accounts you have paid off. Closing long-standing accounts can lower your score by reducing the length of your credit history, which accounts for 15% of your credit score. Creditors want to see that you can manage a mix of installment debts, like loans, and revolving debts, like credit cards.

In addition to paying off credit card debt, remember that your payment history also significantly impacts your FICO score. This category represents 35% of your score, so make sure you consistently make on-time payments and pay more than the minimum required payment whenever possible.

Avoid opening new accounts

When trying to increase your mortgage FICO score, it is important to avoid opening new accounts. This is because opening new accounts can lower your average account age, which will negatively impact your FICO score, especially if you don't have a long credit history.

Opening a new account can also increase your debt-to-income (DTI) ratio, which is an important factor in determining your FICO score. Lenders use your FICO score to determine your credit risk or ability to repay a loan. A high DTI ratio indicates that a larger portion of your income is dedicated to debt repayment, which may make it more difficult to secure a loan.

Additionally, opening a new account can lower your credit score by increasing the "amounts owed" factor of your credit score. This factor is composed of your credit utilization ratio, which is the ratio of your credit balances to your credit limits. When you open a new credit card or line of credit, you are getting closer to your credit limit, which could result in a lower score.

It is worth noting that the impact of opening a new account on your FICO score may depend on the type of account and your credit history. For example, if the new account helps diversify the types of accounts you have, it can increase the "credit mix" factor of your score, showing lenders that you can obtain and manage different kinds of credit. However, if you already have a history of missed payments or other negative marks on your credit report, opening a new account may not have the desired effect of increasing your score.

In summary, while opening a new account can sometimes be beneficial, it is generally advisable to avoid doing so when trying to increase your mortgage FICO score. Instead, focus on maintaining a low credit utilization ratio, making timely payments, and keeping your existing accounts in good standing.

Request credit reports

Requesting credit reports is an essential step in understanding your financial position and improving your FICO score. You are entitled to request a free credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once a year. You can obtain these reports by visiting annualcreditreport.com. Additionally, some online banking services, such as Chase or CitiBank, provide their customers with free monthly FICO score updates.

It is crucial to review your credit reports for any inaccuracies or mistakes. If you identify any errors, take immediate action to dispute them. You can send a letter to the relevant credit reporting company, detailing the inaccuracies and providing supporting documentation. In such cases, the FTC's consumer dispute letter can be a helpful resource.

Another important aspect to consider is your credit utilization ratio, which is the percentage of credit you are using compared to your total available credit limit. Aim to keep this ratio at 30% or lower. You can improve this ratio by paying off debts, especially those close to maxing out. Additionally, increasing your credit limit on card accounts can help improve your credit utilization ratio.

It is worth noting that having all your credit cards report a zero balance can negatively impact your credit score. Lenders prefer to see some activity on your accounts. Therefore, consider keeping a balance of less than 9% on one card, while maintaining the others at zero. This strategy can help optimize your credit score.

By regularly reviewing your credit reports and taking proactive steps to manage your credit utilization, you can make informed decisions to improve your financial position and work towards increasing your FICO score.

Make payments on time

Making payments on time is one of the most important factors in improving and maintaining your FICO score. Payment history makes up 35% of your FICO score, making timely payments the most influential factor when determining a person's credit score. For lenders, a person's ability to keep up with their credit card payments indicates that they are capable of taking out a loan and paying it back.

It's important to pay all your bills on time, including utilities, student loan debt, and medical bills. Missing a payment or making a late payment is easy to do, especially when life gets busy, and your due date can sneak up on you. To avoid this, you can set up automatic payments or use autopay.

It's also important to pay more than the minimum required payment. Paying your cards off in full each month is ideal for achieving the best FICO mortgage rates. You should also avoid maxing out your card balances. It's healthier to use a couple of cards instead of just one. You should also avoid closing cards with zero balances, as this will help you maintain a higher utilisation limit.

In the months leading up to your mortgage application, it's best to avoid opening any new accounts, as this can increase your debt-to-income (DTI) ratio and lower your score. You should also avoid making any large purchases, such as financing furniture or buying a new car, until after closing day.

Maintain low credit utilisation

Credit utilisation, or credit utilisation rate, is the percentage of your credit limit that you're using. It is one of the most important factors in determining your credit score. A high utilisation rate indicates that you may have trouble paying your bills on time, so a lower utilisation rate is generally best for your credit score.

• Keep your credit utilisation at 30% or less: If you can, try to keep your credit utilisation at 30% of your available credit or lower. This will help you avoid taking a hit to your credit score for using too much of your credit limit.
• Monitor your spending: Keep a close eye on your online accounts to monitor your spending. If you're close to using 30% of your credit limit on one card, consider making a payment or switching to another card.
• Pay twice a month: Paying twice a month instead of once can help decrease your credit usage and save you money on interest.
• Increase your credit limit: A higher credit limit will lower your credit utilisation rate. You can request a credit limit increase from your card issuer, but they may ask you questions about your income to assess your ability to pay back any increased debt.
• Don't close your credit cards: Closing a credit card will lower your overall available credit and cause your credit utilisation rate to increase. Keeping your cards open will help you maintain a lower utilisation rate because their credit limits add to your overall available credit.
• Pay down your debt: Paying off your debts, especially those close to maxing out, will help improve your credit utilisation rate.

By following these steps, you can maintain a low credit utilisation rate and improve your credit score.

Frequently asked questions