If you’re planning on buying a home, you should know that maintaining a good credit score (between 700 and 749) can potentially save you hundreds of dollars a month on mortgage payments—and maybe tens of thousands during the course of the loan. Why? A high credit score assures lenders that you likely will be able to repay your loan, and the higher it is, the lower the interest rate they’ll be willing to give you. Here are five ways to improve your credit score and save on your mortgage.
1. Make timely payments
Making your payments on time and in full each month is the most important thing you can do to increase your credit score. Payment history makes up 35 percent of your score, which is the largest proportion of the five factors that credit bureaus consider. Have difficulty paying on time? Consider setting up automated payments for at least the minimum balance each month, and ideally for the full amount you owe, so you don’t begin accruing debt.
Just be sure that you have enough money in your checking account to cover each bill every month to avoid an overdraft. When you know you won’t have to deal with a sudden score dip after a forgotten bill, you then can focus on other ways to improve credit.
2. Make sure you aren’t using too much credit
The second-most crucial component in your score is how much debt you’re carrying compared with your credit limit (which is known as your credit utilization ratio). Your credit utilization ratio makes up 30 percent of your score, and experts recommend keeping it at 30 percent or lower. For example, if you have a credit card with a $10,000 limit, you don’t want to charge more than $3,000 at any one time.
Making regular payments throughout the month can help you keep it in line with the recommended limit. Make a goal to reduce any high-interest credit card debt first since that likely will cost you more money in interest than an auto or student loan. Decreasing your credit card balances also shows potential lenders that you’re responsible with credit.
3. Keep your oldest credit accounts open
Because the length of your credit history comprises 15 percent of your score, it’s a good idea to keep an old credit card account open even if you’re no longer using the card. Your credit scores, in turn, will benefit from a lengthy credit history and a high total credit limit. Closing established accounts will shorten the average age of your accounts and lower your total credit limit.
It can take years before an account closed in good standing drops off your credit report, but the effects on your credit utilization rate are immediate. What if you can’t afford to keep a credit card that comes with a high annual fee? Closing the account could be a good option in this case, or you could ask your issuer to downgrade the card to a no-fee version, if possible.
4. Limit how often you apply for new credit
The number of credit inquiries makes up another 10 percent of your credit score. So, you’ll want to keep in mind that a hard inquiry will appear on your credit report every time you apply for a new credit card or loan. Enough of these inquiries, and it could lead to a brief dip in your credit score. Plan to apply only for the credit you truly need, and after you’ve conducted enough research to understand which accounts you likely will qualify for, and you’ll avoid multiple hard inquiries in your credit file.
5. Maintain a mix of credit
Your lender will look for a mix of accounts to show that you can manage multiple types of credit, and this area accounts for the final 10 percent of your score. These accounts include installment loans that you pay a fixed amount toward each month, as well as revolving credit that comes with a limit you can choose to charge up to (like with credit cards and home equity lines of credit).
If you only have one type of credit in your file, think about adding something different to improve your credit mix. Don’t apply for credit simply to improve your score, however, because that could put you at risk of taking on debt you won’t be able to repay.
