How to Improve Your Credit in the New Year 

11.15.2022 | Category: Article

A top-tier credit score can offer consumers a wide range of advantages, especially when it comes time to buy a house. From lower interest rates to promotional cash-back offers, higher credit limits, and even approval on desirable credit cards, having good credit can give you, as a homeowner, many benefits, even once your home is purchased. 

If you’re considering buying a home in the next year, you might be wondering what role credit plays and how to improve your credit to help you qualify for a new house. Credit is an important factor in the home loan approval process and it’s essential to understand what actions you can take now to improve your credit for the future.

How to Check Your Credit Report

First things first, to improve your credit score, you need to know what your credit score is. Most credit scores range from about 200 to 900, with higher credit scores indicating a low risk for default and lower credit scores indicating a high risk for default or late payments. 

Experian™, Equifax®, and TransUnion® are the three major credit bureaus that curate data and calculate your credit score based on your unique borrowing and bill-paying habits. Each of these credit bureaus are required to provide the information included in your reports at least once a year for free under the Fair Credit Reporting Act (FCRA). Consumers can go to AnnualCreditReport.com to check the data being reported by the three credit bureaus. 

Many lenders, including credit card companies and banking institutions, also provide their consumers with a free credit score monthly. You can usually request to receive a copy of your credit report along with your credit score when you apply for credit as well. This is true whether or not you were approved for the loan. 

How to Understand Your Credit Score

There are five important factors that go into your credit score. Each of these factors is weighted differently when calculating your credit score and different actions can increase or decrease your score. 

Payment history (35%): Your payment history is the most important factor and takes into account how often you pay your lenders on time or how often you are late on payments. Each time a payment is missed, you hurt your credit score. However, each payment you make on time and in full, helps your credit score and is the quickest way to improve your credit over time.

Credit utilization (30%): Another important factor is how much credit you use compared to how much credit you have available to use. For example, if you have a credit card with a $10,000 limit, do you have a reoccurring balance that is low in comparison to your maximum limit or do you max out your credit cards regularly? 

Maxing out your credit cards is one of the worst things you can do to your credit score. In fact most financial experts recommend consumers keep their credit utilization rate below 30%. In the example above you would want to keep your credit card balanced no more than $3,000. This will help your credit score stay healthy in the long run.

Length of your credit history (15%): The longer or older your credit history, the better. This is because length helps lenders understand and predict your credit behavior. Closing credit cards just because you don't use them can actually hurt your credit score because you're positive payment history and low balance help improve your credit score and show credit length.

Recent credit activity (10%): Each time you apply for and receive new credit, your credit score is impacted. This includes new credit inquiries as well as limit increases in some instances. Be sure to work with your existing creditors if you're looking to make changes to your accounts. 

Account diversification (10%): Creditors like lending to borrowers who have a mix of account types, including home loans, credit cards and installment loans. This helps lenders understand that you can be responsible for a variety of loans. 

How to Improve Your Credit with Three Easy Tips

1. Check your credit report for inaccuracies

Reporting errors on credit reports can be minor and unimpactful or major and very impactful. It's important to check your credit report regularly to ensure there are no lines of credit that look unfamiliar or names that aren't yours listed. This can be a sign of an error that is impacting your credit score, or worse, a sign of identity theft or fraud.

If you review your credit report and find information that seems suspicious, you can contact the credit bureau reporting the activity and ask for them to investigate or dispute the information. Once the investigation determines that the information is an error, they can remove it and your credit score could see an instant boost.

2. Pay down high-balance loans with high-interest rates first

Since credit utilization is such an impactful part of your credit score, paying down high balances will quickly raise your credit score. This also helps show positive payment history, another very important factor in calculating your credit score. 

If you have a line of credit that is close to the maximum limit, consider paying that loan down first. If you have an auto loan with a high interest rate, paying more than the monthly payment can create positive payment history while also reducing your overall balance. 

These actions will also help you when securing a mortgage loan as your credit utilization ratio is an essential element to securing a home mortgage loan. 

3. Avoid late payments

A bad habit of paying your bills late can wreak havoc on your credit score. Many lenders offer borrowers easy-to-set-up auto-payment plans as well as reminder alerts. Take advantage of these benefits to avoid late payments and unnecessary dings to your credit score.

If managing your debt is getting too difficult, you can sometimes negotiate grace periods or promotional interest-rate periods in order to pay down balances faster. Some creditors also offer zero-percent interest on loan transfers, which can help pay down high balances quicker.

Before considering debt consolidation or bankruptcy, which can have devastating impacts to your credit score and make it very difficult to be approved for a home loan, consider contacting your creditors to negotiate payment plans directly. A creditor is much more likely to work with a consumer going through hard times before the loan is considered in default and/or in collections. 

How to Know if I’m Ready to Buy a House

Understanding your credit report and credit score is a great first step toward being ready to buy a house. If you feel like your credit is in a good place, you can start contacting lenders for pre-approval.

During this process, loan officers will look at your full financial picture, including your credit history, to help determine how much house you can afford and what kind of interest rate you might qualify for. 

If you feel like you’re credit might be ready to buy a house in the new year, consider calling Mutual of Omaha. Our loan specialists can walk you through your financial options to set you up for success, no matter what your credit history might look like.