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Getting your credit in good shape before applying for a mortgage is a solid idea. Keep reading for a few ways to do just that. [[{“value”:”
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Looking to buy a house in 2024? It’s not really a great market for anyone (well, maybe for people who can buy all in cash and don’t need to worry about mortgage rates), but if it’s your first time, you have my sympathies.
You’ll contend with a ton of competition — according to data from the National Association of Realtors, there was only a 2.9-month supply of homes available in February 2024. This is likely to pick up as we get deeper into the year, but it remains to be seen whether we’ll reach the four to six month supply needed to balance the market between buyers and sellers.
How do you stand out in the crowd, and perhaps save money despite the current average rate for a 30-year fixed loan (6.82% according to Freddie Mac)? Having a solid credit score can help. Here are a few ways to boost yours ahead of time.
Dig into your credit report
If ever there was a time to head over to AnnualCreditReport.com and get copies of your credit report, it’s now. This is the only free way to access your credit reports (you have one from each of the three major consumer credit bureaus), and you can do it as often as weekly, if you’re so inclined.
When you get your reports, pick through them carefully and verify the info you see. If you spot errors, like a delinquent account listed that is actually in good standing, you can dispute them with the credit bureau and have them removed. Errors are frighteningly common — according to Consumer Reports, 13% of Americans have errors that impact their scores.
Ask for a credit limit increase
Another free and relatively easy option to boost your credit score before starting the home-buying process comes with a little risk, if you’re not careful. You can request a credit limit increase from your credit card issuers. They’ll be more likely to agree to this if you’re a customer in good standing who always pays on time.
Increasing your credit limit can lower your credit utilization ratio if you’re carrying a balance, which will in turn improve your credit score. It’s best to keep this number (a percentage of how much credit you’re using vs. how much you have) below 30%, and it’s pretty significant for your FICO® Score, representing 30% of it. (Easy to remember, right?) If you’ve got a credit limit of $5,000, and carry a balance of $2,000, your credit utilization ratio is 40% — not ideal. But if your card issuer is willing to add $3,000 to your limit, boosting you to $8,000, you’ll have a ratio of 25%.
Why is a credit limit increase risky? It might tempt you to spend more on the card, thereby undoing the benefit of the increase and potentially opening you up to pay a ton more in interest if you’re now carrying a higher balance. So only consider this move if you’re sure you can avoid the temptation.
Not cheap, but worth it: Paying down debt
It would be remiss of me not to mention an extremely effective way to get your credit score in the best shape possible ahead of mortgage rate shopping. It’s not “cheap,” per se — but it can do great things for you. I boosted mine by 100 points in the course of paying off existing debt.
I recognize that most people won’t be able to repeat this action, because life is expensive and living paycheck to paycheck is common. That said, if you have the time and flexibility to take on a temporary side hustle (app-based food delivery, like DoorDash, is doable in a more casual fashion than, say, taking a part-time retail job), you can funnel your earnings toward debt payoff.
Not only will this boost your credit score by lowering your credit utilization ratio, but it’ll also give you more breathing room in your budget. This is extremely important as you gear up to take on more predictable monthly expenses in the form of a mortgage payment and all it entails (for example, homeowners insurance and property taxes are often included and sent to an escrow account so they can be paid annually).
Plus, you’re also taking on untold unpredictable expenses — if something breaks, it’ll be on you to pay to fix it. Owing less money to other creditors and having more space in your budget can help immensely.
Ultimately, improving your credit score doesn’t have to be costly — don’t think you need to pay some shady “credit repair” company to do it for you. Instead, look for errors on your credit report, ask for a credit limit increase, and consider paying down some existing debt, if you can. A higher credit score can be your ticket to a more affordable mortgage.
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