How to Improve Your Credit Score
Credit is an important aspect of our daily lives. Our credit score and history are an important aspect of a Mortgage Application, and it demonstrates to the lender your financial health and responsibility to repay debts. Typically, lenders will go by the 2-2-2 rule, meaning two tradelines, for two years, with a $2000 limit.
The stronger your credit report is, the easier it will be to get an approval for loans, lines of credit, and lower interest rates when you borrow.
An important thing to know is your credit score is based on many different factors, and in this blog we want to help you understand what they are and how you can use them to your advantage to have a strong credit profile.
Credit scores are based on these 5 factors:
- Payment History
- Credit Usage
- Age of Credit Accounts
- Credit Variety
- New Credit Inquiries
When looking at your payment history, it is very important to pay off your debt as soon as possible and avoid late payments at all costs.
Make sure you create an alert on your calendar or phone so that you know when you need to pay off your credit card and monthly debt payments. You could even set up automatic bill payments from your bank account.
Another option could be to charge all of your monthly bill payments to your credit card, this way you know that all of your payments are paid in one place, and then make a payment on your credit card to clear out this balance.
When you look at all your credit cards, they all have a limit that you can go to. When looking at credit utilization, you want to keep it at or below 30% of all your limits combined.
Let’s say you have 3 credit cards at $3000 each for a total of $9000. 30% of $9000 is $2700. This means that you should try to keep your outstanding balance below $2700. If you go above, then pay your credit off until you are back to that 30% threshold. If you normally go above 30%, but you are always able to pay off your credit card, it may be wise to ask for a limit increase so that you can have a greater credit utilization at 30%.
Age of Credit Accounts
This looks at how long you’ve had your credit accounts. The older your average credit age, the more favorably you appear to lender in terms of managing long standing credit and keeping it in good standing.
Keep your old credit accounts open because it will it help with your credit utilization ratio, but if you close an account with a negative balance, it can negatively affect you for 7-10 years and it can lower your odds of increasing your credit availability in the future.
As long as you open them for sufficient reasons, and are able to pay them off in time, having multiple types of credit accounts can be very beneficial. These can range from installment loans, revolving debt, mortgage accounts, and open credit cards.
Successfully maintaining a diverse mix of types of credit types may positively impact your credit cards. Just be warned, just because having more open can be beneficial, it can also hurt your credit if you do not use your accounts properly and maintain a healthy credit ratio.
New Credit Inquiries
There are two inquiry types when looking into your credit score; hard and soft inquiries. Soft inquiries could be just checking your credit score with online banking, giving a potential employer a chance to look at it, and credit card companies that check your file to determine if they want to send you preapproved credit offers. These types of inquiries, or soft inquiries, will not affect your credit score.
Hard inquiries on the other hand will affect your credit score. These could include applications for a new credit card, a mortgage, an auto loan, or some other form of new credit. Obviously, these applications are sometimes necessary, and the occasional hard inquiry is ok but having too many in a short period of time can affect your credit score.
Overall, having credit sources can sometimes be overwhelming, and credit scores can be a complicated matter. Credit is an important aspect of a Mortgage Application and following the tips above can help build your score, and overall credit profile so you are able to get the sharpest rates with prime lenders. At GLM Mortgage Group, we have the knowledge and resources to assist with credit and the way it impacts your application – so be sure to reach out with any questions.