How to Improve Your Credit Score for a Better Mortgage Rate in 2024
Planning to purchase a home in 2024?
Credit is one of the primary pillars that makes up your mortgage application. So it goes without saying you will want this to be in the best shape possible when going to apply.
Here are three simple tips to help you prepare your credit for your future home purchase:
Set-up Auto Payments
Relying on your own memory to pay bills on time, every time is a loser’s game. Eventually, you will come up a day short or forget entirely and this will show as a missed payment on your credit bureau. Does this mean that you won’t get approved for a mortgage because you missed one payment? Of course not.
But for those taking their credit score seriously, or who just want to automate their lives a little more, this is a simple but super effective technique to ensure you don’t take any steps back on your credit journey.
Setup either full payment or minimum payments on all your credit card bills and on your utility bills especially your phone bill, as the phone companies are the first ones to go after your credit when you miss a payment and once it’s on your bureau, it’s difficult to reverse.
Don’t use more than 50% of your limit
This one always comes as a surprise to most, as admittedly the logic behind this rule doesn’t really make sense but we’re not the one’s who create the rules, we’re just here to tell you what they are and how to play the game.
Due to a term called capacity you will want to avoid maxing out your credit limits. When you use more than 80% of your limit the credit algorithm will deem your limits over utilized and will negatively impact your credit score.
This over utilization starts as early as 50% of your limit, so as a rule of thumb try not to have outstanding balances that exceed this.
You may be thinking “But I put everything on my card for the points and pay it off every month.” which is a great strategy called ‘piggybacking’. Instead of limiting the purchases you place on your card, what I suggest instead is to look at increasing your limit, as remember it’s not the amount but the percentage used relative to the total limit.
If you’ve had your credit card for a few years, your bank has likely reached out to let you know that you have a pre-approved credit limit increase. If so, take it and run as long as you know you can manage that new limit. This will help address this concern.
Instead of a car loan, get a new credit card or line of credit.
Car dealerships will often sell you on the idea of a car payment saying “It’s good for your credit” leaving out the fact that it may not be so good for your mortgage application.
Car payments are the most common reason for having to reduce or decline someone’s mortgage approval. So if you can avoid creating new debt payments before you buy your home, this will help avoid any setbacks.
Instead of putting yourself in car payment debt to build your credit, consider getting a second or third credit card (Assuming you have at least one already. If not, go get one now.) By having more than one credit card, this will create additional credit repayment history and spread out the reliance of your credit on a single form of credit. This way, if you ever need to close a card down – which I don’t suggest unless absolutely necessary - you avoid erasing all of your history.
If possible get this extra card from a different financial institution then the one you already have your current one(s). This way you’re building a credit profile with more than one lender, which can help when negotiating for your mortgage rate.
Do you have questions on your credit or future home purchase? Give us a call or click here to schedule a call with an advisor.
Written by:
Cody Rowe
Mortgage Consultant
DLC – Modern Mortgage Group
