Your credit score is one of the biggest factors that mortgage lenders consider when deciding how much money to loan and what rate to loan at.
In a lot of cases, a credit score can even be a “make or break” statistic.
In general, people with excellent credit scores (720 or above) qualify for bigger mortgages at lower interest rates. Those with bad scores (below 620) may have trouble getting most types of mortgages.
Even a slightly lower interest rate on a 30-year mortgage could save you tens of thousands of dollars over the life of the loan.
If you want to save by increasing your credit score, the good news is that there are many ways to raise that number. The bad news? Most conventional strategies take lots of time to have an impact.
To raise your score in a hurry, you’ll need to get creative – and that process begins with a crash course in how credit scores are calculated.
A Credit Score Is Born
Credit scores consist of five basic components that have been assigned different weights:
- Payment history (35%).
- Credit utilization (30%).
- Length of credit history (15%).
- New credit (10%).
- Credit mix (10%).
Most score-boosting strategies focus on payment history and new credit.
Google keywords such as “credit repair” and you’ll encounter hundreds of articles on the importance of paying your bills on time, repaying delinquent accounts before the others, etc.
You’ll also see stories advising you to obtain new personal loans and credit cards (which you then pay off ASAP) to help you establish a better payment history.
Credit Utilization Ratio
There even are faster ways to improve your score.
Each is effective, and each uses an often-overlooked component: the credit utilization ratio.
A credit utilization ratio indicates how much available credit you’re currently using. To calculate this figure, divide what you owe on all your credit cards by the combined limit on the cards.
For example, if you have two credit cards with a combined limit of $10,000, and you owe $1,000 or one card and $3,000 on the other, the combined debt ($4,000) represents your credit utilization ratio – in this case, 40 percent.
Your credit score is affected by the total utilization ratio (on all the cards) and the utilization ratio on each card.
Basically, the lower your credit utilization ratio, the better your credit score. (Note: don’t try to reduce the utilization ratio to zero. The credit reporting bureaus want to see some debt.)
According to most experts, it’s best to keep the credit utilization ratio at or below 30%.
Also, the lower your debt to income ratio, the better chance you have of getting approved for a mortgage.
5 Score-Elevating Tips
The 5 tips below will lower your credit utilization ratio by reducing the amount you owe and increasing your available credit.
Balance your debt
If you owe $4,000 on a card with a $5,000 limit, and have no balances on two other cards with the same credit limit, your overall utilization ratio is about 27%. For that one card, however, the ratio will be 80%, which will damage your score.
Avoid this problem by spreading your purchases among all the cards, so that both types of credit utilization ratio remain in the “safe zone.”
Apply for more credit cards
If quickly reducing your total debt isn’t about to happen, an easy solution is to raise your available credit by getting more cards.
For example, if you owe a total of $3,000 on two cards with a combined limit of $6,000, your utilization ratio is 50%. Get two more cards with an additional combined limit of $6,000, and that ratio drops to 25%.
If possible, don’t apply for the new credit cards all at once (that will hurt your score). On the other hand, the positive effects from lowering the utilization ratio may outweigh the negative impact of getting all that new plastic so fast.
Don’t cancel unused cards
Unless your credit cards charges an annual fee, cancelling your card will reduce your available credit, thereby increasing your credit utilization ratio.
Instead of canceling them, use them only occasionally – just enough to prevent the company from canceling them for inactivity, but not enough to raise your utilization ratio.
Request higher credit limits
Another way to increase your available credit is to ask the card issuers to increase your credit limits. The only downside: when you make the request, the issuer may conduct a hard inquiry to a credit reporting bureau, which could slightly lower your score.
You could ask the issuer if they will do a hard inquiry, but even if they do, the benefits of the higher credit limit could more than offset the small hit to your score.
Pay your bills before the reporting dates
The dates on which your bills are due are often not the same dates on which the card issuers report any balances to the credit reporting bureaus. Therefore, you may want to pay your bills early to lower your utilization ratio.
For example: if you completely pay off a credit card on June 25 – when the bill is due – but the issuer reports on the 15th of every month, the credit reporting bureau will list a balance on the card for the month of June.
Pay the bill before the 15th, however, and the issuer will tell the bureaus that your balance is zero, which should give your credit score a lift.
Once you burnish your credit score, it goes without saying that you’ll want to keep it polished.
Aside from maintaining a low credit utilization ratio, the best ways to preserve a good credit score are to pay your bills on time and obtain a mix of different credit types – both revolving credit (e.g., credit cards) and installments loans (e.g., mortgages and auto loans).