While waiting for rates to drop get busy cleaning up your credit ‘report card’

Published Date 6/25/2024

If you’re a would-be homebuyer waiting for mortgage rates to tick downward, you’re in good company. Rather than sit on your thumbs watching for the financial news every day, however, it might be wise to prepare yourself by cleaning up your credit score so that it shines like a beacon in the lending landscape.

Realtor.com’s Janet Siroto says, “A good credit score can play a critical role in helping you get a mortgage with the best possible rate and other favorable terms. That’s pretty darn important right now, with mortgage rates at near 20-year highs.”

But, she says, boosting your credit score is no instant rewards cakewalk. “Most credit-boosting tactics will take many months to kick in, so it’s best to start sooner rather than later.”

Lenders look at your credit score almost like visiting a sooth-sayer. “Your credit score is basically a crystal ball for predicting how likely you are to pay back a loan on time,” says Siroto, who explains how credit-reporting agencies (Equifax, Experian, and TransUnion) dig through your debt history to see how much debt you’ve taken on, whether your payments were (and are still) on time, and how often you may have missed payments. “Using debt responsibly and paying it back on time will give you a better score than someone who racks up big bills on several fronts and pays late or skips payments altogether.

Siroto suggests you begin in the here and now. Where does your credit score stand as you read this? “You can easily check your score online at sites such as CreditKarma.com. Typically, a score of 629 or lower is considered bad; 630 to 689 is fair; 690 to 719 is good; and 720 to 850 (the top score) is excellent.”

Those numbers are like a report card determining which college you’ll get into. The higher your credit score, the better the interest rate and terms will be on your mortgage — almost like winning a scholarship. Siroto says the difference between a 625 (bad) credit score and a 750 (excellent) score can add as much as a half-percentage point to your loan’s rate. Doesn’t seem like much? Think again. If you multiply that extra fee over the term of 360 months to account for the life of your loan, it can amount to thousands of dollars.

If that’s your goal — to win the credit score prize — you’ll first want to pore through your credit report. First scour it carefully for loans or credit cards listed that you never opened (which can happen due to an error or identity theft), misspelled names, or items looking as if they are in collection when you actually paid off the debt long ago. Glitches can be disputed with both the consumer credit-reporting agency and whoever supplied the bad information. You can also dispute information on your credit report yourself for free, using AnnualCreditReport.com, a federally authorized site.

Even if your credit history checks out or you find errors that you need to resolve, it’s a good idea to keep tabs on your score. There are few brighter spots in your day than those moments when you realize your score has gone up. And you can set up credit-monitoring alerts through your bank or through sites like Credit Karma.

Siroto reminds you that not all debt is created equal. “As you look to lower your debt and raise your credit score, zoom in on the high-interest debt. Typically, this is credit card debt. Since interest rates on credit cards can go well into the double digits, make it job No. 1 to pay that down as best as you can.”

She adds, “For debt like federal student loans, which might have a fixed interest rate in the low single digits, it’s fine to pay just the bare minimum and take your time.”

Now. How do you USE credit? Become hyper-aware of how much of your credit limit you’re spending when using your credit cards. Keeping your balance at no more than 10% of your available credit (known as your credit utilization rate) can vastly improve your score. Just because your credit limit on a given card is $20,000 on your card doesn’t mean having fun going out and spending that much. Lenders look at how disciplined and judicious you are about having all that available credit without abusing it as well. That doesn’t mean don’t touch it, however, or you’ll have no tried-and-true track record for them to examine. Instead, tap only about a 10th of that amount. Some financial experts say you can let that figure rise to 20% or even 30% of your limit, but certainly try hard not to exceed that amount.

Those student loans we mentioned? Those that are privately held need a second look. Are they at fixed or variable rates? “In this climate, your interest rates will rise everywhere possible,” says financial expert Michael Jeffcoat. “Private loans don’t qualify for the same payment pause that public loans do.” While high-interest credit card debt takes precedence in terms of what to pay down, private student loan rates can sometimes be equally problematic, with rates raging into the double digits.

Did you know that merely signing up for a credit card — even if you never use it or use it for a single transaction — can send your credit score drifting downward? Siroto says that according to the experts at FICO, a major credit-scoring service, research reveals that opening a few new credit accounts in quick succession represents a greater risk of having problems with debt — especially true for people who don’t have a long credit history.

Bottom line? It’s better to use fewer lines of credit, pay on time, and keep that credit utilization rate low.

Fat credit is not good, but neither is what is called “skinny credit” — in credit lingo something called a “thin file.” This means you don’t have much history tapping debt and repaying it. “Perhaps you are young or new to the workforce or are just the kind of person who prefers to pay with cash whenever possible, and haven’t used credit cards much or taken out a car loan,” says Siroto. “This might mean you have a minimal credit file.” And that, she adds, can be problematic as well. Little or no track record exists to show lenders that you’ve learned to repay your debts well. This, in turn, can drag your score downward.

To get help with improving your credit score, there are a wealth of articles online to learn from. You can also sit down with your mortgage loan-agent-to-be, who may be more than happy to get you on the road to that high number lenders will fight over to get your business.

Realtor, TBWS

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