How to Improve Your Credit Score Before You Buy a House
If you're hoping to buy a house soon, one little number you'll want to bring up to snuff is your credit score. Your credit score is a numerical summary of your credit report, a detailed document outlining how well you've paid off past debts—to your credit cards, college loans, and any place you owe money.
Lenders check your credit score as a way to gauge whether to give you more credit in the form of a home loan. If your credit score is high, you're considered creditworthy, which bodes well for your chances of getting a good mortgage. If your credit score is low, though, lenders might worry whether you'll default on your home loan, and deny you a mortgage (or charge you a premium for it).
In other words: A good credit score is key to the home-buying process. Here's more on who calculates your credit score, how to get a free credit score check, what counts as a good credit score, and some ways to improve your credit score fast.
Credit score basic No. 1: Who calculates your credit score?
Credit scores are calculated by three credit bureaus: Experian, Equifax, and TransUnion. Each of these credit bureaus comes up with a credit score in slightly different ways. For instance, Experian includes your rent payments in your credit report and credit score; TransUnion factors in your employment history. But rest assured all three of these bureaus' credit scores should be roughly the same.
Credit score basic No. 2: How is your credit score calculated?
The main variables that go in your credit report that make up your credit score are the following:
Credit payment history (35%): This is whether you pay your credit cards on time.
Debt-to-credit utilization (30%): This is how much debt you've accumulated on your credit accounts, divided by the credit limit on these accounts. Debt-to-credit utilization ratios above 30% work against you.
Length of credit history (15%): Longer credit history balances are more favorable than shorter ones; ideally you need at least six months to establish credit and have a credit score tallied. (Here's more on how to build a credit history from scratch.)
Credit mix (10%): Your credit score goes up if you have different types of credit card accounts (e.g., credit cards, store credit cards, car/college loans, and more).
New credit accounts (10%): Opening new credit accounts can increase your debt-to-credit utilization, although new credit lines may also work against you. How? Each time you open a new credit line, the average length of your credit history decreases, hurting your credit score. So be sure to weigh the pros and cons of opening new credit accounts.
Credit score basic No. 3: How to get a free credit score check
Have no clue what your credit score is? You can get your free credit score online at CreditKarma.com. You can also check with your credit card company, since some offer a free credit score, too.
To dive into more details on what determines your credit score—as well as any problems dragging your credit score down—you'll need to get your full credit report. You can get a free credit report once a year at AnnualCreditReport.com.
Credit score basic No. 4: What is a good credit score?
A credit score can range from 300 to 850; 850 is a perfect credit score. Wondering if your credit score is up to snuff? Here are the general credit score ranges.
Perfect credit score: 850
Excellent credit score: 760–849
Good credit score: 700–759
Fair credit score: 650–699
Low credit score: 650 and below
Wondering where most people stand with their credit scores? The average credit score hovers around 695. Alas, only about half of consumers have a credit score that falls in the optimal 700-plus range. Here's more on what counts as a good credit score, and why.
Credit score basic No. 5: What credit score do you need to buy a house?
While it varies by area and type of loan, generally lenders will look for a credit score of 660 or higher to grant a mortgage. Although you certainly can get a mortgage with a good credit score, you’ll need a credit score of 740 or higher to get the best interest rates.
And an excellent credit score translates to real savings. In fact, one report by credit site Lending Tree found that if home buyers get a 30-year fixed-rate mortgage averaging $234,43, home buyers with very good credit scores (of 740 to 799) will save $29,106 more in interest payments over the life of the loan than those with a so-so credit score (of 580 to 669).
Got bad credit? There's still hope: Federal Housing Administration loans allow borrowers with credit scores as low as 500 to qualify for a mortgage with a 10% down payment; their credit scores must hit 580 to snag loans that require only 3.5% down payments. (Here's more on the minimum credit score you need for a home loan.)
Credit score basic No. 6: Why to check your credit score long before you buy a home
It's important to check your credit score many months before you buy a home. The reason? It takes time to improve your credit score. In fact, one survey by credit bureau Experian found that 45% of people wait for their credit scores to improve before applying for a mortgage.
But they don't just kick back and wait and pray that their credit score improves. It takes some work to improve your credit score—and knowing what to do.
How to improve your credit score—and how long it'll take
So let's say you've checked your credit score and credit report and found it's less than stellar. What can you do to improve your credit score, and how long will it take?
While a good credit report and credit score aren't built (or, for that matter, destroyed) overnight, there are still some things you can do right now to boost your credit score fast. Here are some sneaky yet totally legit ways you can improve your credit score in record time.
Credit score booster No. 1: Check for credit score errors
For starters, a low credit score may not be entirely your fault. One in four Americans actually finds errors on their credit file, according to a Federal Trade Commission survey on Americans' credit scores. Credit score errors are common because creditors make mistakes with reporting. For example, although you may have never missed a credit card payment, someone with the same name as you did miss a credit payment—and your bank recorded the error on your credit account by accident.
This is why it's important to do a free credit check and look for any errors that could be dragging down your credit score. If you find some errors, you can remove them from your credit report by contacting the credit bureaus (Equifax, Experian, and TransUnion) with proof that the credit information was amiss. From there, the credit bureaus will remove these flaws from your credit report, which will later be reflected in your credit score.
Estimated time it'll take to improve your credit score: If it’s an identity error (like a credit card that's not yours showing up on your credit report), this type of credit error can be fixed in one to two months. However, if it's an error on your own credit card account, it may take longer to be reflected in your credit score, since you'll need to contact your credit card company as well as the credit bureaus. In this case, expect to wait up to three months before this mistake is purged from your credit report, and be reflected in your credit score.
Credit score booster No. 2: Pay down your credit debts
Paying down your debt is the thing you can do that could have the biggest—and fastest—impact on your credit score. Credit utilization (or the amount you can borrow in credit versus the amount of debt you’re carrying) accounts for 30% of your credit score. And the more available credit you have, the better.
If you have the cash on hand, try to time your credit payments so you’re reaping the credit-reporting benefits.
“The easiest way to optimize your credit utilization is to use a credit card and pay your balance down to 1% of your credit limit right before your bank reports to the credit bureaus," says Liran Amrany, founder and CEO of Debitize, a financial technology company that automates better money and credit habits.
"You want to have positive credit utilization so it's clear you are using the card, but otherwise you want your credit utilization to be as low as possible,” adds Amrany.
Not sure when your creditor reports? You could call them up and ask, or you can check your credit report. According to Amrany, you want to pay before the date last reported.
Estimated time it'll take to improve your credit score: One month.
Credit score booster No. 3: Get your credit bills current
You hopefully already know that you have to pay your bills on time to get a good credit score. If you’re already late on a payment, pay that puppy ASAP for a quick credit score boost.
“Because paying credit bills on time is the most important factor in a credit score, going from paying one or more credit bills late each month to paying all on time could show an improvement in one to two months,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.
Bonus: If you’re less than 30 days late on a credit card bill and you can make the payment today, do it! Creditors don’t typically report until after the 30-day mark.
Estimated time it'll take to improve your credit score: One to two months.
Credit score booster No. 4: Open a new credit card account
Opening a new credit card account can help improve your credit score in two ways.
First: “If you open up a new card, which increases your total outstanding credit line, your credit utilization should improve,” Amrany says.
Second: If you have only one type of credit card or a small loan, opening another type (like a store card) can help your "credit mix," a term the credit bureaus use to indicate whether a person can handle different kinds of credit accounts.
Estimated time it'll take to improve your credit score: One to six weeks, based on processing and reporting your new account. Just don’t go nuts—try opening just one new credit account, at least at first. If you apply for a card every time you’re asked whether you want 10% off your purchase, the rash of credit injuries will negatively affect your credit score.
Credit score booster No. 5: Become an authorized credit card user
Have a responsible partner or family member who always pays their credit card bills on time? Becoming an authorized user on one of their credit card accounts will let you piggyback onto their good credit history.
“The full history of the other account shows up on your credit report immediately," Gallegos says. "And when this older, established credit account is added to your credit history, it results in an increase in the average age of accounts you’ve ‘managed’ (which also increases your credit score).”
Just be careful to make sure the person you choose actually pays his bills on time and keeps the debts low—just like good credit history, bad history will show up, too.
Estimated time it'll take to improve your credit score: Immediately.
Credit score booster No. 6: Get a secured credit card or loan
If you’re having trouble qualifying for a traditional credit card, try for a secured credit card, which is "secured" by a deposit. This means that if you default or stop paying, your deposit will be used to pay off the account. This lowers the risk involved for the lender, which makes it more likely to offer you credit even if you don’t have an established credit history.
Estimated time it'll take to improve your credit score: One to two months.
And while you're at it, make sure to keep all your credit cards open, whether you use them or not. As long as they aren't charging you any annual fees, that is. The reason? Closing accounts might increase your credit utilization ratio, which won't be good for your score.
How long does negative info remain on your credit report and affect your credit score?
This depends on what the credit issue is. For instance, credit delinquencies will typically remain on your credit report for seven years. Bankruptcies will remain on your credit report for 10 years. Credit inquiries—where someone pulls your credit report like a lender or credit card company—remain on your report for two years.
Want to learn more? Here's more detailed info on how long it takes to improve your credit score.
Does paying your noncredit-card monthly bills improve your credit score, too?
Can you add to your credit history (and improve your credit score) by calling other providers—like your wireless provider or utility company—and asking them to report your payment history to your credit report? It sounds like a pretty good idea, but it's one that's still in its infancy.
“Each of the major credit-reporting agencies is making some changes to include more bill payments, albeit slowly. In general, though, most of the time, these types of payments only appear on credit reports when they are delinquent,” Gallegos says.
The light at the end of this credit score tunnel is that in early 2019, you will be able to add utility and telecom payment histories to your credit score by signing up for a free credit platform called Experian Boost. To register for early access, you can submit your info and it will be added to your credit report and credit score as soon as this option is available.
So, this last credit move probably won’t improve your credit score right now, but there are still plenty of things you can do to kick-start your credit score makeover. So what are you waiting for?