Your credit score not only affects your ability to secure a mortgage loan but also influences the interest rate you’ll be offered. A higher score can lead to more favorable loan terms, which can save you thousands over the life of your loan. Sounds simple enough, right? Well, there’s a few common mistakes people tend to make while trying to improve their score that can actually do more harm than good.
Poorly Timed Debt Consolidation
Debt consolidation can be a smart strategy to manage your debt by securing lower interest rates and simplifying payments. However, timing is of the utmost importance. Consolidating your debt too close to applying for a mortgage can negatively impact your credit score due to the credit inquiries and the establishment of a new credit account. Ideally, undertake debt consolidation 18-24 months before applying for a mortgage to allow your credit score to recover and to showcase a consistent payment history.
Halting Credit Card Use Entirely
After achieving the milestone of paying off credit card debt, it’s tempting to cut all credit card use to avoid future debt. But this approach can backfire. Active, responsible credit card use is instrumental in building a positive credit history, which accounts for a significant portion of your credit score. To maintain and improve your score, use credit cards for regular expenses and pay the balances in full each month. This demonstrates to lenders that you can manage debt wisely.
Closing Too Many Accounts
Do you have a credit card that you haven’t used in years? It may seem like closing it and having less accounts open would help your credit. Not in this case. Closing the account will actually decrease your amount of available credit, which in turn increases your credit utilization – which contributes to a whopping 30% of your credit score.
Applying for New Credit Accounts
This one is a big no-no. The anticipation of buying a home often prompts a review of one’s financial situation, sometimes leading to the application for new credit accounts. Whether it’s to consolidate debt or prepare for new purchases, each new application can impact your credit score for up to a year. Lenders may view this as an increase in financial risk. If you must apply for new credit accounts, do so well before applying for a mortgagee or wait until after closing to seek additional credit.
Responsibly managing your credit through thoughtful use of credit cards, well-timed debt consolidation, and restraint in applying for new credit will help improve your credit score and your mortgage terms. As you navigate this path, remember that your credit score is a key factor in not just securing a mortgage, but securing one that is financially favorable in the long term.
Contact Julie Krumholz from Superior National Bank
If you are not sure what your credit score is or you still have some questions regarding your credit report and home loan eligibility, reach out to Julie Krumholz from Superior National Bank. Julie has been helping Michigan homebuyers for over 30 years and has several loan programs available for various incomes and financial situations.
Julie has worked in processing, closing and loan origination, underwriting, QC auditing and has even co-owned a mortgage brokerage firm. Her passion for helping homebuyers has made her a trusted resource for those navigating the homebuying process and beyond.
