How to Improve Your Credit Score for a Home Loan

Posted by Steve Vincent on Nov 19, 2013 9:20:26 AM

In Buyers, improve your credit score, better credit, FICO score, Credit repair

Mobile phone, credit card and cashEveryone is interested in "how to improve your credit score". It can seem like a big task, but in many cases, it's actually fairly easy. There are a few things you should know, but first some background.

The single most important factor in determining how much you can borrow and at what rate is your FICO score. FICO stands for The Financing Corporation, a joint, private/government project for helping financial institutions make wise lending decisions. Their set of credit score addition and subtraction rules is complex to the point that whole businesses exist to help consumers manage this aspect of their financial lives. 

Your FICO score is a numeric evaluation of your credit worthiness and is based entirely on what is reported to the three credit bureaus - which, as we all know can be in error. Scores above 760 generally result in the most favorable loan terms and rates. If your score falls below 620 finding an acceptable loan may be difficult.

Improving your credit score can be a major project, but there are a few easy things you can do today and in the near future that will have a major impact.

  1. Pay your bills on time. Pure and simple, that's how to establish yourself as a good credit risk. If this has been a problem in the past, start today to show a new pattern. Borrowers with a foreclosure - possibly the biggest negative in a mortgage history - are sometimes able to get a new loan in as little as 2 years IF they can show a pattern of credit responsibility over that time. So it is wise to start today to give yourself a credit makeover.
  2. Don't close credit card accounts. To have good credit, you have to demonstrate that you use credit wisely. A credit report with no credit is like a beautifully set table with no food.
  3. Have ongoing credit activity. Use your cards, wisely and lightly. That does not mean to rack up balances. It means to have a small balance here and there, to occasionally pay one card off and to never miss a payment.
  4. Get an installment loan. You probably already have or have had one. Credit cards are 'revolving' credit. Installment loans are things like personal loans, auto loans, mortgages and student loans. Showing responsible credit behavior with an installment loan usually carries more weight in the FICO process than similar behavior with revolving credit.
  5. Manage your available credit. Your credit cards have limits. Hopefully your balances are well blow your limits. If not, get busy paying them down, because the gap between your balance and your limit is very important to your FICO score. You want your balances to be below 30% of your limits. You may accomplish this by paying down credit cards, but may also ask your credit card companies for an increase in the limit. Just remember we're talking about how to improve your credit score, not how to go farther into debt.
  6. Give your credit report a once over. There are dozens of places where you can get a copy of your credit report, for a fee or free. Give it a once-over.
          • Look for derogatory entries. Are there any that are false? Dispute them with the reporting agency.
          • Are there any that are insignificant from a monetary standpoint? (note: derogatories are never insignificant from a FICO standpoint). Maybe you got into a squabble with the phone company over a charge and withheld payment. Now that $127 charge that went to collections is dragging your score down. Challenge it. Sometimes, if the amount is not worth the effort, the company will not contest it.
          • Are there derogatories older than 7 years? These are supposed to drop off your report but sometimes they remain. Request they be removed.
          • If you have a late payment with one lender here, and another with a different lender there, but otherwise have a great payment record with both, ask those lenders for a 'goodwill adjustment.' Often the derogatories will be dropped.

Map out a plan using these tips for, say, 8 months. Check your score before and after and see what kind of difference you can make. Of course, we at GreatNest and the Vincent Group are here to help and would be happy to work with you as you improve this important personal metric.