If you’re getting ready to apply for a mortgage, you’re probably looking for ways to improve your credit score. It might seem like paying off your debts and any collections you may have would be a common-sense move, but some experts advise that you shouldn’t pay off your debts until you talk to an experienced loan advisor.
Why? Because old collections (12 months old or more) are not reported on your credit score anyway. But if you suddenly pay them off, you’ll bring the account “current,” drawing it to the attention of the credit bureau. Not only will your score not improve—it may actually drop due to this sudden change. Of course, you should plan to pay off these debts eventually, but there are better places to focus your energy when you’re getting ready to apply for a loan.
If you want to get credit score mortgage-ready, loan advisors suggest that you follow these guidelines:
- Pay your bills on time. This applies to credit cards, car payments, phone bills, and other bills. You should pay at least the minimum amount due and make sure all payments are made by the due date. This is the single biggest factor in your credit score, showing lenders how financially responsible you are and whether they can count on you to meet your monthly payments.
- Reduce your debt. To maximize your score, what you owe on credit cards or other lines of credit should be less than 30 percent of your available limit. You may need to make larger payments for a while, and try to avoid more spending. If it’s easier, keep your credit cards in a drawer to reduce the temptation. Then choose a method (paying off the smaller debts first for a feeling of accomplishment or tackling the biggest, highest-interest balances first) and stick to it!
- But don’t close those credit lines! Part of what your credit history shows a lender is that you can be counted on to make regular payments on time. The longer you’ve been making payments, the better your credit history looks. Try to establish a line of credit for at least six months before applying for a mortgage. Any lines of credit you’ve had for a longer time can also help you qualify for a loan. (It’s okay to pay off your balances each month or keep the balances low, but for the purposes of your credit score, keep the lines open.)
If you’re starting to think about buying your own home, it’s a good idea to meet with a loan advisor as soon as possible. You may not be ready to apply just yet, but we’re here to help you get ready to apply and that includes mapping out a plan to strengthen your credit score. That way, when you’re ready to make your move, you’ll be in a stronger position to qualify for your loan.
In the meantime, you can also check your credit report for free at AnnualCreditReport.com. It’ll show you where you stand right now and where you can make improvements.
It’s never too early to get mortgage-ready! Let’s start your journey to owning a home today.
*Not intended as credit counseling, financial or investment advice. Contact your financial representative for more information.