If you are in the market for a new house, you may be
overlooking one key to your success: your credit score.
That three-digit number has a direct impact on your ability
to get a mortgage and what interest rate you will pay.
Mortgage rates are at two-month lows, with the benchmark
30-year fixed loan at 3.11%, according to Bankrate. On Wednesday, the Federal
Reserve announced it will continue to keep short-term interest rates at near
zero, which means mortgage rates should stay low.
To get that low rate though, you’ll have to have a good
“Even a quarter point or half point can make a really big
difference over the long haul on a large loan amount,” said Ted Rossman, senior
industry analyst at Bankrate and CreditCards.com.
Credit scores range from 300 to 850. A good score is 670 to
739, very good is 740 to 799, and 800 and up is considered excellent, according
to FICO, a leading credit-scoring company.
Homebuyers who took out mortgages in the fourth quarter of
2020 had a median score of 786, according to the Federal Reserve Bank of New
If you don’t measure up, it doesn’t necessarily mean you are
shut out of the market. You can take several moves to improve your score.
First, check your credit history
You are allowed one free credit report a year from the three
main credit-scoring companies: Experian, Equifax and TransUnion. You can reach
out to each directly or you can access them through annualcreditreport.com.
Not only should you know your score, you should also make
sure there are no mistakes or unintended skeletons in your closet, like a
missed payment you forgot about.
Pulling your report before you apply for a mortgage or
preapproval, ideally a few months in advance, will give you time to correct any
Pay bills on time
Late or missed payments can knock down your score.
The easiest way to avoid that is to set up automated
payments for your bills, said Faron Daugs, founder and CEO of Harrison Wallace
Lower your credit utilization ratio
Lenders will look at whether you have high balances on
Even if you pay your credit card bills in full each month,
you may still have a high utilization rate, Rossman pointed out.
For example, if you make $3,000 in purchases and have a
$5,000 limit, you are using 60% of your available credit. Try to keep it below
30%, Rossman said. Those with the best credit scores keep it below 10%.
Making an extra payment in the middle of the billing cycle
can help knock the balance down before the statement comes out.
Become an authorized user on someone’s credit card
If you have no credit, one of the best ways to start
building it is becoming an authorized user on someone else’s card, said Daugs.
“Make sure you do it with someone with good credit,” he
If the account stays in good standing, that will positively
impact your credit.
Get a credit-builder loan
Some community banks and credit unions offer credit-building
loans, which are designed to help the holder build credit as they make
You’ll pay interest, although some lenders may reimburse the
costs after the loan is repaid.
Alternative credit scoring won’t matter
You can boost your credit with alternative solutions, which
count bills that don’t normally go onto your credit report. However, they may
not work for government-backed mortgages.
Experian Boost can bring up your score on Experian by
counting phone, utility and streaming service bills, while eCredable Lift
reports utility and phone payments to TransUnion. Perch allows you to boost
your score with recurring expenses such as subscription services and rent.
The platforms use a newer version of the FICO algorithm,
Rossman said. Government-backed mortgage companies Fannie Mae and Freddie Mac
request older versions, so they won’t see the score improvement.
Don’t rock the boat
If you are looking to purchase a home, hold off on any other
big-ticket items, like a car. Also, don’t open or close any credit cards until
after the mortgage is approved, Rossman suggested.
“It is a sensitive time in your financial life,” he said.
“Lenders don’t want to see anything weird.”
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