How to increase your credit score for a loan

May 12, 2022
Posted in Programs
May 12, 2022 derekevansteam

Now more than ever, it’s crucial to have a good credit score when you start looking for a home to buy. But credit scores are complicated, and a variety of situations and circumstances sometimes out of our control can lead to a low score. The good news is, with the proper knowledge and tools, you can better your credit score and get a lower monthly payment. Here’s how!

How does credit work?

Your credit score demonstrates how trustworthy you are as a borrower for various types of loans. The higher the credit score, the better deals you’ll be able to get when applying for loans. For example, when applying for mortgages, having a high credit score could get you a lower rate than someone with a poor score, as you’ve demonstrated yourself as less of a liability to your lender. Having a high credit score will get you far in life, so you want to do whatever you can to increase your personal score.

The most common score used is the FICO score. Your FICO credit score is calculated using the categories in the chart on the right.

1. Figure out where you stand currently.

Doing what is known as a “soft pull” of your credit is something you should do frequently, but especially before you start your home search. A lot of people are afraid to check their credit score because they are under the impression that checking their credit will have a negative impact on the score itself. While this is true with a hard pull, a soft pull (using tools like Credit Karma, Experian, etc) will give you an estimate of your score that’s fairly accurate and won’t hurt your number. This allows you to see where you stand and if you need to work to increase your score. 

Your credit will only require a hard pull when you actually begin the process of applying for loans. In order to get pre-approved, most mortgage companies will require a hard inquiry on your credit.

2. Pay bills on time.

This might seem obvious, but paying your bills on time is one of the best ways to increase your credit score. This is the most fundamental aspect of building credit. However, this can be difficult and unexpected financial burdens do come up. To avoid the repercussions of this, take inventory of where your money is going each month and see if you can cut down on the amount of money going towards bills. For example, subscriptions you’re not using, wasteful electricity use, etc. Cutting down on unnecessary spending can leave you money to put towards more essential bills and keep you on track for paying on time.

3. Pay off credit card debt – and avoid adding more!

Credit card utilization is another factor impacting your score. Did you know that utilizing more than 30% of your credit could hurt your score? It seems silly (why have all this credit you’re not supposed to use?!) but it’s the way things are, so pay attention to how much you’re charging to your card. 

A simple way to avoid racking up credit utilization is to only spend money you already have available to you. It’s a good habit to pay your credit card off regularly multiple times per month to avoid allowing charges to stack up that you won’t be able to pay off.

4. Do NOT make big purchases before closing a loan

If you’re in the middle of the loan process or even just starting to look for a home, avoid making large purchases such as new cars or other big ticket items that will drain your bank account.

5. Do not apply for other loans while working on increasing your score for a mortgage

In addition to the above, ensure that you don’t incur any further debt while applying for a mortgage. Taking out more loans will affect what is known as your debt to income ratio (DTI) which is a huge factor in getting you approved for a mortgage. The narrower the gap between what you owe in loans vs the income you’re bringing in every month or year, the less appealing you’ll be as a loan candidate to underwriters.

6. The last and best way to improve your score: CrediTool

We understand that increasing your credit score can be complicated and difficult to do on your own, which is why Fairway created CrediTools Credit Improvement Program to help borrowers get their score up fast. One of our highly skilled credit analysts will be assigned to review your credit report and draft up a personalized credit improvement action plan that will tell you step by step what to do to improve your score. Your credit analyst will be there with you every step of the way to guide you, answer questions, and help keep you on track to achieving your goals. To get started improving your credit, contact us today and an experienced loan officer will be in touch within 24 hours.