How To Increase Credit Scores Before Applying For Mortgage

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How To Increase Credit Scores Before Applying For Mortgage

This BLOG On How To Increase Credit Scores Before Applying For Mortgage Was UPDATED On January 8th, 2018

Consumer credit report and credit scores is probably the most important factor that lenders and creditors take into account when applying for credit. Creditors of mortgage loan, automobile loan, business loan, credit cards, or other types of credit will pull and thoroughly review credit scores and credit payment history as part of their credit approval process.

  • A poor payment history can have devastating effects and hinder chances of obtaining credit
  • A low credit score means a loan denial or high interest rates
  • One late payment can plunge credit scores by more than 50 points
  • No credit is equivalent to bad credit
  • Bad credit can also mean a job denial or a job promotion opportunity
  • Bad credit can mean higher insurance premiums
  • Credit errors on credit report means lower credit scores which can cost thousands
  • I can hinder chances of getting a mortgage loan or other loans

Tips On How To Increase Credit Scores Before Applying For Mortgage

In the following paragraphs, we will be discussing ways of maximizing your credit scores via some simple tasks.

  • Every consumer should sign up for a credit monitoring service by Equifax, Experian, or Transunion.
  • For a small monthly fee, consumers get an alert by the credit reporting agencies if there are any changes in credit report and/or credit scores.

Credit Card Balances

Common sense says dictates that paying off debts and having a zero credit balance on credit card should maximize credit scores.

  • However, that is not the case
  • Little debt on credit balances will definitely maximize credit scores
  • However, a zero balance on credit card will not maximize credit scores
  • It will not hurt or drop credit scores
  • It will not maximize credit scores due to credit utilization ratio

Credit Utilization Ratio

There is a factor known as your credit utilization ratio.

  • The credit utilization ratio is the percent of credit balance limit on a credit line
  • A zero balance will not factor into credit utilization ratio factor
  • This particular ratio is the percent of credit limit that is being actively used and counts 30% of overall credit score

Below is how the credit utilization ratio is calculated:

  • Take available credit balance and divide it by current credit card balance
  • For example, if credit card limit is $1,000 and credit card balance is $900, divide $1000 by $800 and it will yield a factor of 0.80
  • Then multiple the factor, 0.80 by 100 which yields 80
  • The lower the factor, the better the results on increasing credit scores
  • Consumers who had a credit card balance of $100 and  credit card limit is $1,000, the factor will be 10
  • 10 is lower than 80, thus, having the lower credit card balance will maximize credit scores
  • This is a great way of boosting and How To Increase Credit Scores Before Applying For Mortgage

Having Zero Credit Balance

Having a zero credit card balance will yield a credit factor of zero, thus, hurting borrower’s credit score.

  • $0 divided by $1,000 will yield a factor of zero
  • Always keep a $10 credit balance on credit card

Impacts Of High Credit Card Balances

Lenders in general consider those who have high credit card balances a high risk borrower.

  • They normally want to see consumers have a credit card balance of 30% or less
  • Having a high credit card balance will definitely lower credit scores
  • Always keep credit card balances below 30% of credit limit and if possible, keep credit card balances as low as possible but greater than zero

Negative Impact Of Late Payments

A recent late credit card monthly payment can and will drop credit scores dramatically.

  • One late payment can drop your scores by 30 points or more. 
  • In the event consumer had a recent late payment, contact the creditor and see if they can give a one time break and have the late payment not reported to the credit reporting agencies. 
  • Consumers who had a good payment history with their creditor and made payments timely, the creditor will probably give them a one time reprieve and delete the late payment from the credit reporting agencies. 
  • Consumers who had a history of late payments, the creditor will most likely not do it.

Never Close Out Active Revolving Account Is Another Way On Maximize Your Credit Scores

Many consumers have a tendency in closing out active credit card accounts to avoid the urge of using them and not to be in debt. This is not a good way on How To Increase Credit Scores Before Applying For Mortgage.

  • However, this practice is detrimental to credit scores  
  • 15% of overall credit scores is determined by the longevity of past credit history
  • In closing an active credit account will shorten credit payment history, especially if they had the credit card for a long time
  • The more credit accounts that a consumer have that has been established, the more they maximize credit scores
  • Even if the consumer have a zero balance and have to pay an annual fee, please keep those credit cards active and do not close them out

Credit Inquiries

Credit inquiries can hurt credit scores.

  • Try to avoid applying for credit cards or other credit all at the same time
  • Consumers who have a dozen inquiries in a month, this will devastate their credit scores
  • This will alert the creditors that something is wrong and shows that they are desperate
  • These hard credit inquiries will stay on credit report for 2 years and will hurt chances of future credit approvals
  • Try to apply for no more than 4 new credit and keep the inquires as low as possible

The ideal credit accounts a consumer should have is 5 to 10 and a 3 plus year credit history is ideal.

Gustan Cho, NMLS ID 873293

Related> Maximize And Maintain Your Credit Scores

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