February 17th, 2015 4:25 PM by Chris Styner
When you are ready to buy a home, your lender will take a long look at your credit scores. Those numbers will play a big part in the terms the lender offers.
If you have bad credit, you may struggle to get approved at all. Even if you have fairly good credit, a few points could mean a difference of thousands of dollars of interest. Boosting your credit score before you apply for a loan can help you get a better rate, and there are a few ways to pull it off.
A recent study by the Federal Trade Commission found one in five consumers had at least one error on a credit report. Some of those errors were big enough to damage the consumer’s credit score. The good news: The credit bureaus have to investigate and remove or correct any errors you find.
Order a copy of your credit reports from all three credit bureaus—Equifax, TransUnion and Experian. By law, you are entitled to a free copy every year through AnnualCreditReport.com. Once you have the credit reports in hand, comb through them and dispute any errors you find with the bureau responsible. The credit bureau has 30 days to investigate and remove errors.
While any debt has an impact on your credit scores, credit card debt is weighted more heavily than revolving debts such as student loans or auto loans. Paying down your credit card debt can boost your credit scores. Most experts say you should aim to keep your credit card debt at no more than 10% to 30% of your available credit limit.
Under the FICO model, bill payment history accounts for 35% of your credit score. Even one late payment is enough to drag down your scores, but you may be able get the black mark removed simply by asking your creditor. Known as a “goodwill deletion,” the creditor may be willing to remove the late payment information if you have an otherwise spotless history with the company. However, creditors aren’t usually willing to do this if you have a history of late payments.
If you are working on improving your credit scores before you apply for a mortgage, you may be tempted to cut up your old, unused credit cards and close the accounts. Don’t! That will backfire. The length of your credit history accounts for 15% of your credit score. By closing your oldest accounts, you are shortening your overall account length, which will only hurt your credit score. Instead, once you pay off a credit card, tuck it away in a drawer and keep the account open to keep building on your credit history’s length.
Once you have taken steps to lessen the damage of your past, do not let history repeat itself. Aim to pay all of your bills on time each month. Every timely payment you make will add to the positive history on your credit report. Over time, you will see your scores improve across the board.
Laura Sherman contributed to this article.