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Improving your credit score to take advantage of low interest rates

Now is a great time to lock-in a very low interest rate on a mortgage for the purchase of your home! However, you need to have the highest credit score possible to qualify for the lowest mortgage rates.

Your credit score is calculated using 5 criteria: your payment history (35%), the amount you owe on your available credit lines (30%), the length of your credit history (15%), your amount of new credit (10%), and the types of credit you have (10%).

You may be thinking..."What can I do to improve my credit score now?"

We've got 5 tips:

1. Payment history has the biggest impact on your credit score. Make sure that all of your bills are current, including credit cards, utility payments, etc., and make it a New Year's Resolution to pay your bills on time.

2. If you can't pay off the entire balance on your credit lines, pay special attention to your debt-to-credit ratio. Your balances should not exceed 50% of your total credit limit. For example, if you have a $5,000 credit card limit, try to avoid having a balance higher than $2,500 at any time.

3. Review your credit report from all three agencies (Experian, Equifax, and Transunion) at least once a year. It won't affect your score if you request your report directly from the three agencies or an organization authorized to provide credit reports to consumers. Look for mistakes on your credit report that could be negatively affecting your score, and contact the agencies in writing if you find any. Also, if there is anything in your report making your score lower that was reported by one of your creditors, if your account is now in good standing, call your creditor and see if they would be willing to remove the negative item.

4. Be careful not to open any new credit accounts or close any old credit accounts in the twelve months prior to applying for a home loan. Closing older accounts reduces the length of your credit history and also lowers your credit available (which raises your debt-to-credit ratio that we mentioned above). You might think that you are "cleaning" up your report by closing accounts you don't use; it is actually better just to leave them alone and check to make sure that they maintain a $0 balance when you review your credit report.

5. Do your home loan shopping within two weeks. A quick influx of credit inquiries for your score within a two-week window only counts as one credit request.

We hope this is helpful! If you have any other questions about your credit score, please post your question and we'll be happy to respond quickly.

Also, check back frequently for other helpful tips to assist you with your house hunt!

Sarah Bailey, CFP (R)
NeighborCity.com Team