Learn how to improve your FICO score
All home buyers can benefit from improving their credit score numbers. Improving your FICO score betters your chances of getting approved for a mortgage. And it could also fetch you a lower interest rate and save you thousands of dollars in interest payments.
FICO scores range from 300 to 850. Mortgage applicants typically get the best rates when their FICO scores are 720 or higher.
Wondering how to improve your FICO score fast? Here are seven steps that can make a positive impact on your credit rating.
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Seven ways to improve your FICO score
Here are a few proven strategies to increase your FICO score before applying for a mortgage loan.
1. Check your credit reports
Your payment history has the largest impact on your FICO score at 35% of your overall score. It is vital, therefore, that you keep current on all of the accounts reporting to your credit report.
When reviewing your credit files, should you find any accounts that are past due, catch them up as soon as possible, and pay at least the minimum payment required within 30 days of the due date.
How late payments affect your credit
With 12 months of timely payment history, you can dramatically improve your FICO score. And, with 24 months of on-time payments, the improvements can be even bigger.
FICO compares the number of accounts paid against the number of accounts with late payments, along with the severity of those delinquencies. Late payments over 90 days have a more negative impact than 60-day late payments; and 60-day late payments have a greater negative impact than 30-day late payments.
If you have difficulty making on-time payments, then consider enrolling in automatic payments with each creditor and card issuer. By authorizing payments to be directly debited from your bank account, you are less likely to forgo payment.
2. Dispute your inaccuracies
Should you detect any errors on your credit report, you will want to request a correction as quickly as possible. In order to make a correction, use the information on your report to contact the credit bureaus and also the creditors who provided the erroneous data to the bureaus.
By law, the major credit bureaus are usually required to investigate the item in question within 30 days, unless they consider your dispute to be frivolous. You may need to submit documentation that supports your position. Send copies only — never originals.
Within 45 days, the credit bureaus will notify you with the results of your investigation. Getting even one late payment removed from your credit report can improve your credit score dramatically.
3. Ask for a little grace
Sometimes, a creditor may be willing to “help you out.” In cases where you make a relatively small slip-up with a creditor you’ve never been late with, you can sometimes get a late payment waived. It’s always a good idea to make a phone call and to ask for a little grace.
There are many examples of creditors removing a late payment from your credit report if there’s a legitimate story behind what happened, and if you can explain what steps you’ve taken to avoid a repeat occurrence. This works best if you catch the delinquency early and bring the account current right away.
4. Settle up collections, charge-offs, judgments, and liens
Old collection items, credit card charge-offs, judgments, and liens can hurt your FICO score, too. If you have any of these on your credit report, it’s time to contact your credit card companies and collection agencies to settle up one at a time.
- First, settle the accounts that went delinquent within the last 24 months because these more recent accounts create the biggest drag on your FICO credit scores
- Then, in looking at your collection items over 24 months old, proceed with care. This is because FICO puts the most weight on your recent credit history, which encompasses the last two years only
This is why your FICO score may drop when you pay off a collection account over 24 months old. Once the account is paid, it becomes “recent,” which may cause damage to your score.
In many cases, you can negotiate with your creditors to remove a credit line completely in exchange for settling an account for its full balance. You need to call your credit card companies first, however, to find out.
You can also hire the services of a credit repair company to help you broker deals with creditors and card issuers. Removing negative marks from your record may help you improve your credit score fast.
5. Keep old accounts open
The length of time you’ve had credit makes up about 15% of your FICO score.
As a rule of thumb, lenders like to see borrowers with an older average age of credit. But as you close old credit lines, pay off car loans, and open new credit cards, you reduce the average age of your credit, which can have a negative impact on your FICO. This is why it’s typically a good idea to keep older lines of credit open, provided it’s not costing you money to do so.
6. Improve your credit utilization ratio
Another way to improve your FICO score is to lower your “credit utilization ratio.” This compares your credit balances against your total available credit limit. The FICO scoring model takes into account the balance of each individual credit account, as well as the balance of all of your credit accounts combined.
- If you have five credit cards, each with a $2,000 credit limit, you have a $10,000 credit limit over all five accounts
- If you carry a credit card balance of $1,000 on one of the five accounts, you would have a 50% utilization ratio on one card and a 10% utilization ratio over all of your credit
In general, a credit utilization rate of 30% or less is good for FICO scores. Utilization over 30% is often bad.
The best way to improve your credit utilization ratio is to pay off debt. Pay revolving credit accounts down first, followed by debt from installment loans. You can also improve your credit utilization by increasing your amount of available credit. Simply ask your credit card company for a credit limit increase.
7. Build credit gradually
If you have a limited credit history, then opening a secured credit card is one way to build credit. You’ll generally put down a deposit equal to your credit limit, which then enables you to use the secured credit card as you would any other payment card.
You can also build credit when a family member or partner adds you as an authorized user to one of their credit cards. But be aware that becoming an authorized user can also negatively impact your credit, if the primary card holder should ever max out their credit limit or submit payments late.
Additionally, the credit bureau Experian offers a free service called Experian Boost. It helps you build credit with on-time payments that won’t normally appear on your credit report, such as those to cell phone providers and online streaming services.
What is a FICO score?
Your FICO score is a three-digit number that usually ranges from 300 to 850. FICO is just one type of credit score —VantageScore is another — but its the one most commonly used by mortgage companies. Furthermore, FICO has multiple models. FICO 8 and FICO 9 are popular versions, while some lenders use older varieties for mortgage loans, such as FICO 2, 4, or 5.
The FICO credit score takes into account a combination of all of the information found in your credit report. Mortgage lenders often use FICO scores to understand your creditworthiness and to predict the likelihood that you’ll repay your loan. The better your FICO score is, the easier it is to qualify for a mortgage. High FICO scores almost always lead to lower interest rates, too.
Your FICO score is made up of the following:
- Payment history (35%): Your history of on-time payments
- Credit utilization ratio (30%): The sum of all of your loan and credit card debt compared to your total available credit
- Length of credit history (15%): How long you’ve had credit
- New credit inquiries (10%): The frequency of hard inquiries and new account openings
- Credit mix (10%): This is the type of credit you have, which can include auto loans, personal loans, student loans, and credit card accounts
To find out what is impacting your FICO score you will want to review your credit reports. You can get a free credit report from each of the three major credit reporting agencies — Equifax, TransUnion, and Experian — at annualcreditreport.com.
It is important that you order and review the reports from each of the bureaus because different credit files may contain different sets of information or errors, which could affect your FICO credit score negatively. For example, a settled medical collection may appear on your Experian report but may be shown as “in collection” with TransUnion and Experian.
FICO scores are generated based on a snapshot of the information on your credit report as of the particular moment that the report is pulled. Correcting errors is crucial, therefore, to ensure the highest possible FICO score.
Why a good credit score is important
Having good or excellent credit can transform your personal finances. Good credit leads to lower rates on everything from car loans to auto insurance, and it can help you qualify for better offers from credit card issuers. When it comes to home buying, improving your FICO score can help you save thousands of dollars on your mortgage. You may also be eligible for a broader range of loan programs.
Good credit will also increase your home buying power, and those with a 20% down payment can avoid private mortgage insurance (PMI).
FICO credit score tiers for home buyers:
- 740 or higher: Excellent
- 680-739: Great
- 620-679: Good
- 580-619: Fair
- Below 580: Poor
While credit score requirements vary by lender, you’ll typically need a FICO of 620 or more to qualify for a conventional loan. Lenders often require a minimum of 580 for FHA and VA loans, while USDA loans may need scores as high as 640.
If you currently have bad credit or simply want lower mortgage interest rates, then improving your score is the first step.
Check mortgage rates for your FICO score
Mortgage rates are often dependent on your FICO score. In general, the higher your credit score, the lower rate for which you’ll be eligible. This is among the reasons why it’s good to improve your FICO score to its highest level possible.
“Your lender may have the ability to help you increase your FICO,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “We have simulators to run scenarios in order to see what we can do to get your score to the best possible place.”
If you’re curious what rate you qualify for — or whether you can get a loan at all — connect with a lender. Preapproval is often free and will give you all the answers you need to start your home buying journey.