If you’re planning to buy a new car or home in the near future, you need to make sure your credit score is as high as possible. Lending institutions decide how creditworthy you are based mainly on your credit score. Higher scores are the key to lower interest rates and payments when you borrow money.
Thankfully, there are a few simple strategies you can use to boost your credit score by as much as 50 points this year. Better still, these strategies are relatively accessible. You can start implementing them fairly quickly to start seeing your credit score climb right away.
Have you set your sights on raising your credit score this year? If so, here are the top five ways to revamp your credit score in 2021:
1. Consolidate Your Credit Card Debt
Credit utilization is the part of your credit score that reflects how much money you have spent on your available lines of credit. If you only have one credit card with a $5,000 limit and carry a $2,000 balance on it, your credit utilization is 40%. Lenders use this metric to gauge how you handle credit that’s been extended to you.
Carrying higher balances relative to available credit can mean that you’re financially overextended and relying on credit cards to pay bills. Lower credit utilization often means that you have a better handle on using credit responsibly. That results in a higher credit score which, in turn, leads to more favorable rates.
While the easy answer to improving your credit utilization is to pay down your balances, that may be easier said than done right now. Instead, consider these methods of consolidating credit card debt to reduce your credit utilization and boost your credit score.
Balance Transfer Credit Cards
The idea behind using balance transfer credit cards is simple, and it works in two ways. First of all, these cards generally offer a 0% introductory APR when you transfer a balance from another card as a way to earn your business as a new customer. This low APR will initially lower your monthly payment if you’re charged interest at a higher rate on your original credit card.
Secondly, opening this new card will add to your available credit. Increasing your available credit and maintaining the same balance reduced your credit utilization.
Debt Consolidation Loans
These loans are an alternative to balance transfer credit cards. They’ll usually charge you a lower interest rate. You’ll need to pay off your balance in equal monthly installments, which can improve your credit mix (types of credit that you have access to) and lower your credit utilization at the same time.
Access To Better Interest Rates
Being plugged in to the local economy has its perks. Since your mortgage bankers live and work in the communities where you’re looking to buy a home, expect that they’ll have pretty specific knowledge of all of the loan opportunities that are available to you. They may also be able to offer insight into any state or regional programs that might help you secure a lower interest rate and save quite a bit of money.
In addition to having the time to sit down with you and get a deeper sense of your financial situation and long-term goals, mortgage bankers are familiar with these types of programs in your area. They’ll help you sift through which programs will work for you better than any big lender (who probably doesn’t even live in the same state) can. The bottom line is that knowing the ins-and-outs of the local landscape can save you lots of money.
2. Make All Of Your Payments On Time
Your payment history is the single most crucial indicator of your creditworthiness. Every time you make a payment on your credit card or pay a loan installment, it’s reported to the credit bureau. If you make a late payment, or even worse, miss a payment altogether, that can have a substantial negative impact on your credit score.
Ultimately, this is how you prove that you can pay back all of your obligations and properly manage your liabilities. Over time, the best thing that you can do is to make the required monthly payments consistently. Consistently high marks in your payment history will go a long way in assuring lenders that you will be responsible with what you borrow. Similarly, a pattern of default of late payments shows that you may not be worthy of additional credit.
3. Avoid New Credit Cards Or Loans
Every time you apply for new credit, your potential lender will pull your credit report to decide if they should extend you credit and how much credit they should give you. This is called a hard inquiry, and it remains on your credit report for two years.
A hard inquiry shows up on your credit report when you seek financing for a new car, apply for a mortgage, or get a new credit card. When you apply for new credit, the bureaus are notified, and you’ll see a small decrease in your score. Making multiple credit applications in a short period can signal trouble to a potential lender, too, and it’s not usually the best course of action.
You may be able to shop around for the best rate. Depending on the bureau, you may have between 15-45 days to have similar inquiries lumped into a single hard inquiry impact on your score.
The second reason not to take out new loans or open new cards while trying to boost your score is to avoid decreasing your open accounts’ average age. Reducing that number can cause a slight decrease in your score.
4. Consider Raising Your Credit Card Limits
If you’ve been a great customer to your credit card provider, then it may be a good idea to ask for an increased credit limit. If you’re tempted to run up your increased limits with higher balances, don’t consider it an option.
Generally, if you have consistently made payments on time, maintain a reasonable balance and have a good history with the company that you’d like to increase your limits with, then your chance of success is high. If the opposite is true, your lender may view your request for extra credit with skepticism. Missed or late payments are often a sign of financial debt and difficulties, and in this case, it begins to sound like you may need the extra credit to make ends meet.
To request a credit limit increase, call up your credit card company and ask for one. Think about how much credit you’d like to be extended, and ask for a bit more to settle around a number that will work for you.
Increasing your credit limit will help you to reduce your credit utilization. If we go back to that first example of credit utilization, consider that carrying the same $2,000 balance on a credit card with a limit increased to $10,000 reduces your credit utilization to 20%, which can boost your score.
5. Evaluate Your Financial Performance
Staying on top of your credit and financial debt with a routine review of your credit history is an essential part of building or boosting your credit score. It’s also one of the best ways to prevent identity theft since one of the first places you’ll find evidence of this is on your credit report. Here are some things to take into consideration as you take a look at your financial performance.
- Dispute errors on your credit report. If anything is incorrect, contact your lender to make the necessary corrections. Finding a missed or late payment, for example, can be remedied quickly. If you provide proof of the error, it can be disputed and removed. Finding errors can restore several points to your score because of how vital an excellent payment history is.
- Consider diversifying your credit. Potential lenders like to see that you can manage different credit types, like installment loans and revolving credit, like credit cards. If it makes sense, try to diversify the types of credit you use and keep them current.
- Pay down high balances first. Ideal credit utilization ratios are below 20%. Going over 50% credit utilization can cause a 30+ point score loss, which is a pretty big hit. To recover those points, prioritize paying off high credit card balances. Make payments above the minimum if you can, to bring those balances down as quickly as you can.
- Don’t close your credit cards. As tempting as it is to cut up a credit card that you’ve worked hard to pay off, you’re better off sticking it in a drawer and putting a small recurring charge, like your Netflix subscription on it. Then set that to auto-pay. Doing this maintains your average age of accounts. If you were to close the account, the average age of accounts would decrease and potentially hurt your score.
Contact Us At A and N Mortgage For Help
Many people avoid dealing with their credit because it seems lofty or inaccessible or because they’re intimidated by what they don’t understand. Starting with these five suggestions can quickly and easily get you on your way to a better credit score, leading to better overall financial health on the way to tackling financial debt.
Ultimately, your credit score is a reflection of how creditworthy lenders believe you’ll be with the money that they lend you. For people trying to improve their credit to secure a mortgage, it’s important to remember that your income and assets also factor into the mortgage rates you qualify for.
If you have any questions regarding these topics, please contact us here at A and N Mortgage. Our team of skilled, knowledgeable professionals can help you navigate these often confusing and intimidating tasks with our precision and years of experience.
A and N Mortgage Services Inc, a mortgage banker in Chicago, IL provides you with high-quality home loan programs, including FHA home loans, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.
A and N Mortgage Service, Inc. NMLS No. 19291 Neena Vlamis NMLS No. 37370