Improve my credit

You’ve been eagerly awaiting this day. It’s time to approach a lender and apply for a mortgage pre-approval – a significant stepping stone toward fulfilling your homeownership dream. At this point, it would be pretty disappointing to hear a lender say that you don’t qualify for a mortgage. 

To avoid that, you’ll want to dig into potential reasons for mortgage disapproval in advance. A low credit score is the main culprit. If you plan to buy your home sweet home, the last thing you want is a poor credit score.

There are many reasons for a low credit score and many ways for you to fix them. 

What is impacting my credit score?

Listed below are the most common factors:

1.      Late credit card payments

Have you been late on paying your bills on your credit accounts? If it’s a one-time thing, there’ll probably be no impact. (Phew!) But if you’ve missed multiple payments, have paid 30 days past the due date or are frequently paying late, you are in trouble.

Late payments hurt your credit score. According to NerdWallet, a payment 30 days past its due date will hit your credit score hard—to the tune of 100 points. And if you’re paying late by 60 days or 90 days, expect a worse impact. (That could put you in poor score territory fast!)

Credit scoring company FICO analyzes your past payment history with a 35% weight on your credit score. This applies to all your credit accounts, including mortgages, auto loans, credit cards, etc.

What about tax liens or foreclosures? Any issues such as debt settlements, lawsuits, and bankruptcies will also shrink your credit score.

And a reduced score leads to lenders losing trust in your loan repayment ability—which could shatter your homeownership dream unless you take measures to fix it (more on that later).

2.      Credit utilization

Just how much available credit do you have at your disposal? This counts more than you might think. The second most important parameter used by many credit scoring companies is your credit utilization, which is the percentage of credit limit used. If you’ve maxed out your credit card, you can expect a lower credit score because of it.

For FICO, credit utilization carries a 30% weight in credit score. And maxing out your credit cards in certain scenarios will lead to a maximum drop in credit scores.

Let’s say you have five credit cards with a combined credit limit of $20,000, and you’ve maxed out one card at $3,000; that counts for a mere 15% of your available credit. The impact on your score would likely not be all that significant. 

But, if you have just one credit card with a $4,000 limit and you put $3,900 on that card? You’re right up against the limit and will face a major drop in your score. Your credit activity gives lenders an insider view into your spending behavior, and in this case, the action you’ve taken isn’t exactly prudent. (But you knew that, right?)

3.      Age of your credit accounts

Do you have an old credit account you’ve been longing to close? Hold on a sec. A long-running credit account actually adds to your credit score, even if it’s gone unused for a lengthy period of time. Unless you’ve got a compelling reason to close it—e.g., you’re concerned someone will steal the card, or you will suddenly go on a random buying spree with it—keep it open for the sake of your credit.

Your older credit accounts and the average age of all your credit accounts add 15% to your FICO credit score. Old ones demonstrate your credit ‘age’ and personal experience with handling credit over time. Closing them will make you look like a newbie in the credit game, thus reducing your score.

4.      The credit mix

Does it matter what kinds of credit accounts you have? Yes, yes it does! Having different types of credit makes up 10% of your FICO credit score. And for VantageScore, the age of your accounts and credit mix combinedmake up 21% of the credit score

Lenders usually see the credit mix to determine how responsible you are with various credit types. Of course, having a credit mix won’t help much if you aren’t paying on time.

5.      New credit applications

Have you been applying for new loans lately? Remember this: every inquiry you make or new loan you take out will negatively impact your score. Ouch.

To be specific, new credit applications have a weight of 10% in your credit score. Opening a bunch of credit accounts in a short period is perceived as risky behavior by lenders. You can avoid raising those pesky red flags by not attempting to get a few new loans all at once.

Does my credit need repair?

If your mortgage request has already been denied because of a poor credit score, it certainly needs some attention. As of August 2021, the average FICO credit score in the U.S. was 716. That kind of robust score is essential if you want to buy a new home (or even a new car).

Here are some tell-tale signs that indicate you need to improve your credit score:

1.       Your credit score is under 650

According to Experian, a credit score of 650 or below is considered ‘fair.’ Statistics from Experian show that 28% of consumers in the Fair group tend to become delinquent on payments. When you’re lumped in with that company, your chances of obtaining a mortgage and pre-approval are pretty dim.

2.       Your credit card application is rejected

Credit card companies usually notify you of the reasons for declining your application through an adverse action notice. It’s typically due to the information in your credit report, such as limited credit, past or present delinquent accounts, foreclosures, and bankruptcies, among other negative credit history.

The notice typically contains the name of the credit bureau that provided the credit report. If you find any discrepancies, you have recourse: file a dispute with the bureau and you could potentially reclaim a higher score.

3.       Landlords keep denying you

Are you finding it difficult to rent a place? Landlords are legally allowed to perform a credit check and can turn down applicants if they find any lapses in their credit report.

A low credit score is the first deal-breaker. Most landlords want tenants’ credit scores to be 620 or higher. Further, they check for on-time payments on your credit accounts to ascertain your seriousness when it comes to financial commitments. 

4.       You received a risk-based pricing notice

Lenders increasing the interest rates is an important sign that your credit needs repair. This happens when the lender finds issues in your credit report. They usually alert you with a risk-based pricing notice per the Federal Trade Commission’s (FTC) rules.

For example, let’s assume that you’ve applied for homebuying mortgage at a rate of 3.5-4.5 percent annual interest. Based on a less-than-ideal credit report, the lender might grant it—however at a much higher rate. 

5.       Debt collectors are calling you

When you repeatedly fail to make payments on your debt, creditors will call debt collectors to recover what you owe them. These collection accounts appear on your credit report and hamper your chances of getting a new credit card or a mortgage for your new home. And you might be surprised: an old cable account you thought you paid off and cancelled years ago could be coming back to haunt you. (Stranger things have happened!)

Here, credit repair involves either paying off the remaining debt or disputing errors in your credit report with the credit bureaus.

Fixing your credit score

You could call this the ‘tough love’ section. You know what to do; now you’ll have to employ some self-discipline to get it done. Naturally, you want the best mortgage rates and terms to finance your new home purchase—and in that case, it’s time to boost that credit score.

There are several ways to fix it:

1.       Review and dispute errors on the credit report

As mentioned above, you can fight inaccuracies that are damaging your credit score. According to a Consumer Reports investigation, 34% of Americans found at least one error in their credit reports. Reviewing and disputing errors with the credit bureaus will help fix the score. To file a dispute, use visit FTC’s consumer information.

Credit bureaus may respond to your request immediately and delete the information. However, they have the power to reinstate deleted information if it is verified later. Of course, you won’t be left in the dark: by law, bureaus are required to notify you whenever this happens.

2.       Hire credit repair services

Credit repair companies negotiate with creditors on your behalf and help improve your credit score. They help remove inaccurate or unverified information from your credit reports, often presented to the credit bureaus by debt collectors, banks, and credit card issuers. 

But be wary of the costs involved. Credit repair companies often charge hefty prices.

3.       Pay on time

As you know, your payment history has an immense impact on your credit score, more than anything else. Staying on track with your bill payments is a surefire way to improve your score. You generally have a grace period of 30 days past your due date; beyond that, your lenders will report any delayed payment to the credit bureaus, which will hurt your score. The best move, though? Setting up automatic payments for your due dates.

Depending on your financial situation, you can choose to pay either the bare minimum (which will subject you to interest fees) or to pay your card off in full every month.

4.       Lower your credit utilization rate

Could you charge fewer things to your monthly credit cards? If you have a high credit utilization rate across your credit accounts, bringing it down is the best way to fix the credit score, especially your revolving debt (credit card bills). Knowing how the credit utilization rate is calculated will help you here.

                        Credit utilization rate = total debt / total available credit

For example, if your total available credit is $40,000 and your total debt is $25,000, then the credit utilization rate is 62.5%, which is very high. For a better score, try to lower utilization rate to the single digits.

You can do it by paying off balances, requesting an increase in credit, and keeping your older accounts open.

5.       Stop applying for new loans frequently

As previously mentioned, each new credit application and every newly opened account hurts your credit score. A single hard inquiry may have little effect. However, if this is a frequent thing, it will reflect badly on your score. Limit any inquiries into your credit and only open a new account when it’s absolutely necessary.

Hang in there!

Credit improvement takes time and persistence. A single missed payment might not impact your score too much. But if you’ve been missing multiple payments, recovery will take a lot longer. Moving ahead with the determination to improve your credit score and taking the actions describes above will be key. Exhibit patience and discipline consistently with your finances, and you’ll be rewarded in time.

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