How To Improve Your Credit Score

Your credit score affects your home loan options, rates, and down payment requirements. Discover what shapes your score, how it influences lenders, and the steps you can take to improve it before buying or refinancing.

Your credit score may seem like just a number, but it has a big influence on your ability to secure—and potentially save money on—a home loan. What is a credit score, and how can it impact your home loan, whether you’re purchasing or refinancing? Even more importantly, what steps can you take to improve it? Let’s explore.

Understanding Credit Scores

Your credit score is a three-digit number–ranging from 300 to 850–that summarizes your creditworthiness based on your financial history. Lenders use this score to gauge how likely you are to repay borrowed money, whether that’s a credit card, auto loan, or a home loan.

When it comes to buying a home or refinancing, your credit score plays a significant role. It can impact the type of loan you qualify for, the interest rate you receive, and even much you need for a down payment. A higher score usually means more loan options and lower rates, while a lower score may limit your choices or raise borrowing costs.

The Factors That Affect Your Credit Score

Your credit score is calculated from several credit history factors, including:

• Payment history and whether you pay bills on time
• How much of your available credit you’re using
• Length of credit history
• Types of credit used, such as credit cards, auto loans and mortgages
• How often you apply for new credit

Where Does Your Credit Score Come From?

So who assigns this all-important number? In the U.S., credit scores come from the three major credit bureaus: Equifax, Experian and TransUnion. These bureaus track your credit activity, such as loans, credit cards, payment history and outstanding debts, and use that data to create your credit report. Scoring models like FICO^® and VantageScore^® then take the information in your credit report to establish your numerical credit score.

When you apply for a home loan, lenders usually pull reports from all three bureaus and often use the “middle” score to review your application. This helps ensure your creditworthiness is measured using consistent, standardized information.

Credit Score Considerations When Buying a Home or Refinancing

Now that you know what goes into your credit score and where it comes from, let’s see how it can impact the types of home loans you may qualify for

Different loan types have different credit score requirements. For example, government-backed FHA and VA loans tend to have more lenient criteria, while conventional and jumbo loans usually require higher scores. While your actual required score may vary slightly based on the specific loan product, loan amount, property type and underwriting review, the following are some general guidelines:

• FHA loan: 580+ with a minimum down payment of 3.5%
• VA loan: 620+ (some lenders may go as low as 580)
• Conventional loan: 620+
• Jumbo loan: 700+
• VA Cash-Out Refinance: 620+
• USDA Streamlined Assist Refinance: No strict FICO score minimum, however this loan requires 12 months of on-time payments on your USDA loan

How to Check Your Credit Score

Since your credit score is based on the information in your credit report, knowing what’s in that report and verifying its accuracy is essential. Even a single incorrect entry can lower your score through no fault of your own.

You’re entitled to a free credit report from each of the three major credit bureaus—Experian, Equifax and TransUnion—once a year through AnnualCreditReport.com. Reviewing your report–at least annually–helps you catch and correct mistakes, avoiding harm to your credit.

7 Tips to Improve Your Credit Score Before Applying for a Home Loan

If you’re getting ready to buy or refinance a home, it’s best to make sure your credit is in the best shape possible before applying for your loan. A healthy credit profile can give you access to more favorable loan options and terms. The following are practical steps to strengthen your credit and put yourself in a better position with lenders.

1) Pull Your Credit Reports and Fix Any Errors

While understanding what is on your credit report is always important, it’s even more critical if you plan to apply for a home loan. You’ll want to contact the credit bureaus and scrutinize your credit report for any mistakes. Common credit report errors include:

• Debts or accounts that don’t belong to you
• Missing accounts (especially those in good standing, which can help your score)
• The same account listed more than once
• Old debts that should have been removed

If you spot an error, act quickly. Contact the credit bureau that issued the report and provide:

1. A clear description of the error
2. Documentation that supports your claim

Corrections can take a month or more to process, so the sooner you start, the better. If you’re already working with a lender, talk to them about which errors to dispute first.

Want to take advantage of your free credit report? Learn how to get a free, no-strings-attached credit report and the information you need.

2) Pay Down Credit Card Balances

Prioritize paying down high credit card balances. This can help you in two ways:

Lowers Your Debt-to-Income Ratio

It can lower your monthly payments, making your debt-to-income (DTI) ratio look more attractive to lenders. Your DTI is calculated by dividing your total monthly debt payments by your monthly gross income. It’s expressed as a percentage, and in this case, smaller is better. With fewer competing bills, lenders see you as more able to repay a new loan.

Reduces Credit Utilization

Credit utilization measures how much of your available credit you are using. Reducing your balances lowers your credit utilization rate, which can increase your credit score.

For example, if you have a credit card with a $5,000 limit and a $2,500 balance, you are utilizing 50% of your available credit. If your utilization is very high, lenders may see it as a potential risk, signaling that you could be overextended and might have more difficulty managing additional debt.

3) Bring Past-Due Accounts Current

If you have late accounts that are not yet in collections, bringing them current can prevent further damage to your credit. Once the accounts are updated to on-time status, your score will no longer be affected by those late payments. It’s best to address these as soon as possible.

4) Use Your Credit Cards Less Frequently

Keep your credit utilization low by putting fewer charges on your credit cards, unless you’re in the habit of paying them off in full before the end of each billing cycle. You can also make a mid-month payment to bring your balance down before your statement closes. This way, the balance reported to the credit bureaus will be lower, which can help your score.

5) Pay on Time

Always pay your credit cards and other bills on time, especially while your loan application is being processed. Even if you’ve been pre-approved, a single missed payment can slow things down or even derail your approval.

A consistent track record of on-time payments is a key factor in your credit score and one of the first things lenders look for during underwriting. It also shows you can manage your current obligations, which makes it easier for lenders to feel confident you’ll handle the added responsibilities of a mortgage, insurance, property taxes and any typical homeownership expenses.

What Is the 15-3 Credit Card Rule and Can It Help?

Speaking of credit card payments, you might have heard of the “15-3” rule. It’s a strategy where you make one credit card payment 15 days before your statement due date and another three days before it’s due. In recent years, it has been popularized online as a “hack” to keep your credit utilization lower throughout the month.

Does it work? Not directly. That’s because credit card companies usually report balances to credit bureaus around the statement closing date, not the due date. It can, however, help you stay organized, avoid late fees, and manage your balances, which in turn are good credit management practices.

6) Keep Your Current Credit Cards Open

If you do decide to use your credit cards less often, it might seem logical to close some accounts. However, it’s actually best to keep them open. That’s because when you close an account, you are reducing your amount of available credit. As a result, you may be raising your debt-to-available-credit ratio.

For example, if the total of all your credit card limits is $10,000 and the total of the balances equals $2,000, your ratio will be 20%. But if you decide to close a line of credit with a limit of $6,000, your ratio will be raised to 50%.

Another reason not to close it is that older, active accounts help your credit history length, which also boosts your score. Closing them shortens your history and can lower your score.

7) Increase Your Credit Limits

Another way to potentially improve your credit utilization ratio is to call your credit card lenders and ask for a higher credit limit. If you owe $1,000 on a $2,000 limit, you’re using 50% of your limit; if you can get an increase to $3,500, your utilization drops to 28.6%.

Keep in mind that some lenders may perform a hard inquiry when you request a credit limit increase. This shows up on your credit report and can have a small, temporary impact on your score. It’s always a good idea to ask your lender whether the request will trigger a hard pull before proceeding.

How Long Does It Take to Improve Your Credit Score?

How fast can you raise your credit score? While there is no quick fix, the above actions can help your score rise over time. Prioritize the areas that matter most to lenders. With consistency, you may see improvements in as little as 30-45 days.

What to Do If You Have No Credit

Improving your credit score is always beneficial, but what if you have no credit at all? Without a repayment history, lenders may see you as an unknown risk. This is sometimes called a nontraditional credit history, meaning you’ve never had credit cards, loans or other reported debt. While it can make getting a home loan more challenging, it’s still possible. You may just need to explore a few alternative options.

Most people have a history of paying at least some bills, such as rent, utilities or a car payment. Having a strong payment history with these types of bills can show that you are a reliable borrower and may even be reported to the bureaus as a part of your credit score.

How to Start Building Credit

Building credit can open the door to more loan options and better terms. In addition to keeping up with your regular bills, here are three low-risk ways to begin establishing a solid credit history.

• Apply for a secured credit card: Secured credit cards differ from others because they require a deposit. Like regular credit cards (but unlike debit or prepaid cards), they can help you build credit by reporting your activity to the major credit bureaus.
• Apply for a credit-builder loan: Typically issued by credit unions, these small loans generally have short (6-24 month) terms. Making these payments on time allows the credit union to make positive reports to the credit bureaus on your activity.
• Apply for department store credit cards: Obtaining a department store credit card may be another way to start building your credit, as some will approve applicants with scores considered far less than ideal, or those with no credit at all.

Bonus: You may also receive additional discounts and benefits by holding such an account. Just be mindful to use the card responsibly, as department store cards often come with higher interest rates, so try to pay off the balance in full each month.

A Small Number With a Big Impact

Your credit score is like a snapshot of your various financial choices. Each time you pay a bill on time or resist making an unnecessary purchase, you’re taking a step toward your financial goals—such as securing the best home loan for your needs.

If you are ready to start exploring your mortgage options, contact a Pennymac Loan Officer or get an online rate quote today.