6 Things To Make Sure Your Credit Score is Mortgage Ready

Did you know one factor affects your finances above all others? It’s true; your credit score has the power to save (or cost) you thousands of dollars and directly affects your approval odds for loans, a mortgage, and more. Unfortunately, many people are unaware of how their financial habits impact their credit score, finding out too late that they’ve already done considerable damage. Currently, over 16% of all Americans report having a poor credit rating, with a FICO score between 300 and 579. If you’re one of the millions of people with a low credit score, the good news is that there are things you can do to improve it. With time, patience, and the steps below, you can raise your score and get the credit you deserve.

What Is A Credit Score?

A credit score is a way to predict the likelihood that you will repay your debts on time. Shown as a number between 300 and 850, lenders use it to determine your creditworthiness. FICO uses the following range:

Poor: >580

Fair: 580 – 669

Good: 670 – 739

Very Good: 740 – 799

Excellent: 800+

Along with providing more lending opportunities, your credit score also determines the amount of interest you pay on your loans, with higher scores paying a lower percentage. Additionally, those with a higher score have more credit options since they appear more dependable to potential lenders, while those with lower scores will have a harder time finding credit opportunities.

What Determines Your Credit Score?

There are five aspects that determine your credit score, and it’s important to note that while these factors don’t change, their amounts will vary monthly. These components include:

• Payment History – (35%)
• Amount Owed – (30%)
• Length Of Credit History – (15%)
• Credit Types – (10%)
• Recent Credit Inquiries – (10%)

Listed beside each component is a percentage indicating its importance in determining your overall score, ranked from highest to lowest. Let’s take a closer look at each and how it impacts your ranking.

Payment History

There’s no doubt that your payment history has the biggest impact on your FICO credit score, accounting for 35% of the overall number. Unfortunately, the way this factor works, you only get a small boost for paying your loans on time, while a missed payment results in a fairly large penalization. If your credit history shows multiple negative payment marks, it signals to lenders that you may struggle to manage your debt or possess a flippant attitude toward repayment.

Amount Owed

How much you owe to lenders accounts for 30% of your overall score and includes your loan types and additional compounding indicators of your credit profile. Your total amount owed and how that number is spread across multiple lenders speak to your ability to manage your debts.

Length Of Credit History

Your length of credit history accounts for 15% of your credit number and includes the length of time your existing accounts have stayed open and includes your oldest loan account. The longer your history, the better a lender can judge your credit behavior and finances, which helps them determine possible future financial behavior.

Credit Types

The types of credit you have only accounted for 10% of your score, but that doesn’t mean it’s not still important. Having a range of loans, including a mortgage, installment loan, revolving credit, and consumer finances, can be a green flag for lenders.

Recent Credit Inquiries

Recent credit inquiries also ranks lower at 10%, which is good news if you’ve recently tried for a new loan. There are two types of searches to be aware of, hard and soft inquiries. Hard inquiries include credit card applications and can temporarily lower your credit score, while soft inquiries like checking your score will not cause it to decrease.

Why Your Credit Score Is Important

We briefly touched on why your credit score is important, but understanding why you should strive for a higher overall number is the first step to creating a positive credit profile. Your credit score affects two main areas:

• Your ability to get approved for a loan or credit card
• The interest rate you pay once approved

If you have a higher score, you have a greater chance of approval and a higher likelihood of a lower interest rate. That’s good news since it means it will cost you less money over time. A lower score reduces your chances of receiving new or increased credit and significantly raises the interest rate you will pay if approved. Now,  if your credit score needs a little work, don't let that scare you out of shopping for your dream home right now. JR Mortgage is ready to help you navigate your current situation and refinance you into a lower rate once you raise that score.

What You Can Do To Increase Your Credit Score

While a low credit score can be discouraging, there are steps you can take to raise it. While it will take time, if you are patient and stick with it, you will soon see your number begin to rise!

1. Pay Your Bills On Time

As you read above, one of the worst things you can do for your credit score is to pay your bill late or miss it altogether. Your payment history accounts for 35% of your overall score, and repeated negative marks will drop it like an anchor in the ocean. One trick to help expedite your credit recovery is to pay your bill twice a month. To do this, split the payment amount into two, so you’re only paying the amount due, but it will register as if you’re making multiple payments toward your balance. Doing this will boost simultaneously boost your credit and help you avoid late or missed payments.

2. Keep Your Balances Low

When your credit card balance is high, it tells lenders you can’t afford your current lifestyle. It lowers their confidence in your ability to make future payments and drops your score. Many people retain a higher balance, choosing to only pay the minimum amount due, which adds up in the long run. Many lenders prefer you to keep your balance under 30% of your total available credit, while some suggest staying under 10% is ideal.

3. Make A Debt Reduction Plan

You should never go into debt repayment blindly; instead, make a plan to lower your balances that you can stick to and won’t stretch your finances too thinly. Take some time to sit down and gather all your debt information, including how much you owe, interest rates, minimum payments, and the number of open accounts. From there, you can create a payment schedule that will keep you from forgetting to pay down your balance. Here are a few tips you can use to make the process more effective:

• Prioritize higher-interest loans first
• Pay more than the minimum amount due if possible
• Make an extra payment toward the interest, not only the principle
• Set up auto-pay

4. Identify Any Errors

Checking your credit score through sites like Credit Karma or Experian will help you identify any errors that may show up. You can also see if there are any old debts, which you might be able to have removed. Under the Fair Credit Reporting Act, a debt can only stay on your report for seven years; after that time, you can petition to have it removed. By removing old debts, you can see an immediate boost to your score. Every state has different laws regarding debt removal, so be sure to check what options are available to you in your area.

5. Continue With Responsible Credit Use

Although it may seem counter-intuitive, using your credit cards does help increase your score. Spending less than you pay every month will ensure your balance decrease and your score increase. The key is to stay below the previously stated 30%, which will keep you from running up your balance and continuing the debt cycle that always negatively impacts your score.

6. Don’t Make Multiple Credit Inquiries In A Short Period Of Time

One of the best ways to see your credit score drop quickly is to make multiple inquiries in short succession. Every time you apply for a loan or credit card, it pings your score, dropping it slightly. When you do this once, the impact is negligible, but if you compound it multiple times, you will see a noticeable decrease in your score. One thing to remember is that if you’re applying for a credit card and you’re declined, the chances that other cards will also turn you down are pretty high. Credit shopping rarely has a positive result, so cut your losses and focus on improving your score before you apply for another loan.

At JR Mortgage Group we are fortunate enough to be able to shop loan options for you even if your credit score isn't the best it could possibly be. With the changing market, it is important to understand your credit score, its impact on your finances and the best way to improve it. While there’s no doubt of the many advantages having a high score provides, it’s encouraging to know that even if it is lower, there are steps you can take that have a big impact. All it takes is patience, discipline, and knowledge, and you can have the credit score you’ve always dreamed of and enjoy all the advantages it has to offer!