Ask the Expert: Improving Your Credit for a Home Purchase

As Director of Consumer Lending, Jeff Smrcka oversees the consumer lending division which includes auto, home equity and personal loans along with our credit card programs.

Today’s housing market can be hectic. Between the shortage of homes available, the corresponding rise in home prices and the speed at which they’re being taken off the market, it’s harder than ever to obtain your new house. If you missed the opportunity to buy this spring or if you’ve decided to wait a while before trying to buy, you’re in the perfect position to bolster your credit worthiness so that when you are ready to apply for a home purchase, you will qualify for the best interest rate and terms available.

Here are some Dos and Don’ts when it comes to improving your credit for a future home purchase, as recommended by industry experts.

Do:

  • Check your credit report periodically (or at least annually). Request it from one of the three credit reporting agencies (Equifax, Experian and TransUnion). In a few months, you can request your report from one of the other agencies so that you always have a timely and official report. Once you have your credit report, make sure to check for any inaccuracies and/or open accounts you have no use for that can be closed.
  • Keep your credit utilization low. Lenders prefer usage ratios of 30% or less on revolving accounts, but generally, the lower you keep your credit balance, the better. If you use your credit card(s) to make purchases frequently (which is perfectly fine), and you regularly use more than a third of your limit every month, try making payments twice a month instead of just once when the payment is due.
  • Pay more than the minimum required amount on your credit cards each month. Ideally, you should be paying your balance off in full every month. Only paying the minimum costs you more in the long run because of the interest you’ll be charged. What’s worse is that carrying a balance causes your credit utilization ratio to increase.
  • Consolidate outstanding debts into one payment—whether this means moving multiple credit card balances onto one credit card or paying off debt with a new loan using available collateral (i.e. a vehicle or real estate) to obtain a better interest rate. Both options will give you a simpler payment structure, reduce or eliminate debts quicker and save on unnecessary higher interest charges.

Don’t:

  • Miss a payment. This means not just credit payments but all payments, including student loans, rent, utilities etc. Payment history is one of the most important factors affecting your credit score. You need to show lenders that you have made payments on time consistently—to prove that you’re reliable—in order to get a good interest rate and acceptable loan terms on your future home purchase.
  • Close your oldest credit cards unnecessarily. Again, payment history is one of the most important factors in calculating your credit score. If you close your oldest credit accounts, your score could be lowered, so weigh the benefits of closing against the drawbacks.
  • Open new credit cards needlessly. Having more credit accounts won’t necessarily improve your score and lenders might be skeptical of your ability to manage your credit if you have too many open revolving accounts. Avoid opening new cards if you don’t need to, especially if you’re planning to apply for a loan.

While none of the above tips are guaranteed to raise your credit score, they’re good guidelines for strengthening your credit worthiness over a longer period. Just remember that time is the best tool in improving your home purchasing power. Consistently making changes to your credit habits over time will help you reap all the available lending benefits.