Applying for a mortgage? How to maintain a favorable credit score?

 

What is the current status of your credit score? In that case, it's critical to catch up. Your ability to finance large purchases, such as a home or car, is greatly influenced by your credit score. Because this score is based on your payment history and the amount of debt you have, lenders will use it to decide whether you are a good candidate for a mortgage. Lower interest rates, greater credit limits, and increased purchasing power can all be attained with a higher credit score. Conversely, the opposite may occur from a lower credit score. There are methods to maintain your credit score so that you're prepared for a major purchase, even though there isn't a magic wand that can instantly fix it.

What Is a Credit Score?

A credit score, which ranges from 300 to 850, indicates a person's creditworthiness based on their debt, debt repayment history, and other financial data. Lower interest rates may be the result of a strong score—more than 700.

According to a recent Credit Karma analysis, a borrower can save more than $20,000 in interest over the course of a 30-year conventional loan by raising their score by 20 points.

Lenders view you as more creditworthy the higher your credit score.

How Is Your Credit Score Calculated?

Though there are different credit scoring models, most use similar financial behaviors to calculate them.Here are the main factors that typically influence credit scores:

Payment History (35%): This is a record of the payments you've made on credit accounts, such as mortgages, credit cards, and other loans. While late payments, defaults, and bankruptcies can have a negative effect on your score, on-time payments have a positive effect.

• Credit Utilization (30%): The ratio of your current credit card balances to credit limits is examined by this factor. Generally speaking, a lower ratio is preferable since it indicates that you are not unduly dependent on credit.
  
  

• Length of Credit History (15%): One factor taken into account is how long your credit accounts have been open. Longer credit histories are generally viewed favorably because they offer more information that can be used to determine your creditworthiness.

• 
  

• Types of Credit in Use (10%): A variety of credit histories, including mortgages, credit cards, and installment loans, are preferred by lenders. One may see a varied credit profile favorably.

• 
  

• New Credit (10%): It can be interpreted as risky behavior to open multiple new credit accounts quickly, as this could be an indication of financial strain. Additionally, your score may be temporarily negatively impacted by each new credit inquiry.

Tips for Maintaining Your Credit Score

You can safeguard the credit you already have by being aware of the factors that affect it and how important it is to have one. Here are eight recommendations for keeping your credit score high.

Pay your bills on time

Experts state that payment history accounts for a substantial portion of your credit score—35 percent, to be exact. Having consistently made your payments within 30 days of the due date, you can make a significant difference in your score. This covers your rent, utilities, phone bill, credit card bills, and any loans you may have, including student or auto loans.

Keep your credit utilization as low as possible

The majority of credit experts advise borrowers to maintain a credit utilization rate of no more than 30%. The total amount of credit you are using divided by the total amount granted to you is known as credit utilization.Paying off your credit balances is one approach to reduce your credit utilization.

Avoid applying for additional financial products.

A "hard pull," also referred to as a "hard credit inquiry," is probably something you've encountered if you've previously applied for a loan or other credit. This is how lenders learn more about your past credit and debt management practices. A hard inquiry will typically result in a few point drop in your credit score. Hinduja advises against applying for other financial products, like credit cards or even new phone plans, if you intend to apply for a mortgage soon.

Check Your Credit Report:
Get a copy of your credit report from every major credit reporting agency. Every 12 months, you are entitled to a free report via AnnualCreditReport.com from each bureau.

Check the reports for any mistakes or inconsistencies, and raise any that you discover.

Do Not open New Credit Accounts:

Your credit score may temporarily decline if you open new credit accounts, such as loans or credit cards. It's best to refrain from obtaining new credit while applying for a mortgage.

Don't Close Old Credit Accounts:

Your credit score is influenced by the length of your credit history. Your credit history may be shortened by closing previous credit accounts, which could have an impact on your score. It may be advantageous to keep your old, unused credit cards open.

Maintain Stable Employment and Income

Your job and steady income are factors that lenders frequently take into account when reviewing your mortgage application. Steer clear of significant adjustments during the application process, such as changing careers or jobs.

Work with a Mortgage Professional
To find out how particular financial choices might affect your mortgage application, speak with a mortgage loan processing professional. Based on your unique situation, they can offer advice on the best course of action.

Keep Your Credit In Check

Refusing an invitation to sample an expensive new restaurant or resisting the urge to buy something while perusing social media can be difficult. However, you risk using credit cards excessively if you allow your spending to spiral out of control. In the short term, it might seem like free money, but you still have to pay it back. Overextending yourself puts you at risk of missing or being unable to pay your balance on time.