A lot of clients have been reaching out to ask about credit lately. One of the most common questions fielded is how to improve your credit score. No problem – we hear you, and we’ve put together this short step-by-step article to help you out.
Step #1: Raise Your Credit by Opening a New Account
Yes, you heard that right. One thing you can do to increase your credit score is to open up a new credit account or two.
This ties into how MyFICO calculates your credit score If you notice, there are two pieces of the pie that comes into play here:
- 10% of your score is based on new credit
- 10% of your score is based on your credit mix
The first one regarding new credit is important because the credit bureaus get antsy if they see you opening a lot of new credit lines at once. For example, let’s say you signed up for 3 credit cards, a student loan, and a car loan all within a few months. That looks suspicious and will most likely dent your credit score.
You don’t want to do that. But it is okay to expand your credit mix with a new line or two.
For example, let’s say the only credit you’ve ever had is a credit card. You can expand your mix by getting a home utility in your name. If you’re a student, maybe you can take out a small student loan as well.
Credit bureaus like a good credit mix because it shows you have experience dealing with multiple types of loans and are more financially savvy.
Step #2: Keep Your Old Credit Accounts
Let’s say you have three credit cards but you only use one of them. The other two are just sitting in your wallet unused and have been there collecting dust for years.
While it may be tempting to close them out, you probably shouldn’t do it.
Credit bureaus base 15% of your credit score on your credit history. And since your credit score is an important factor to qualify for a conventional mortgage – or any time for that matter – you want to do everything you can to keep that number high.
If it bothers you to have credit cards in your wallet, take them out and find a safe place for them. Freeze them in ice and stick them in the back of your freezer. Cut them up – whatever suits you. Just don’t close the account!
Step #3: Catch Up on All of Your Bills
Are you a little behind on a bill or two? If so, you should try to catch up on your payments.
The #1 factor that affects your credit score is payment history. And did you know that a missed payment can stay on your credit report for up to 7 years? A lot can change in 7 years, and you don’t want a small mishap dragging your credit score down.
So do whatever you can to pay your bills. Cut back on eating out temporarily. Take on a part-time side hustle if you must. Your credit score and wallet will thank you when you get a lower mortgage rate on your home purchasing loan!
Step #4: Pay Down Debt to Improve Your Credit
Aside from your payment history, the second biggest factor affecting your credit score is credit owed. This is tied to what’s called your credit utilization rate.
Your credit utilization refers to how much of your debt you’re actually using. So for example, let’s say you have a credit card with a maximum of $15,000. If you have a $3,000 balance on that card, your credit utilization is 20%.
The lower your credit utilization, the better. That means you aren’t carrying too much debt, which will help your credit score.
If you can take action to pay off your debts faster, your credit utilization rate will improve, driving up your credit score at the same time.
Conclusion
Do you have any questions on these 4 steps to improve your credit? Send us an email or call us at (949)-373-5834. We’ll do everything we can to get you up to speed and make you feel comfortable with the home buying process.