Waiting for Mortgage Rates To Go Down Before Buying a Home? Why You Should Clean Up Your Credit Score Now

If you’re waiting for mortgage rates to subside a bit before you buy a house, there’s plenty you can do in the meantime to prepare—starting with cleaning up your credit score.

In fact, 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.

Plus, boosting your credit score can take time and can’t be pulled off overnight. Most credit-boosting tactics will take many months to kick in, so it’s best to start sooner rather than later.

So if you’re holding off on homebuying, it’s the perfect moment to polish your credit rating. Here’s how you can use this time wisely so that you’re in the best possible shape once you do decide to dive into home shopping.

Why your credit score matters when buying a home

Your credit score is basically a crystal ball for predicting how likely you are to pay back a loan on time. Credit-reporting agencies (Equifax, Experian, and TransUnion) dig through your debt history to see how much debt you took on, whether your payments were 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.

As such, the first step to improving your credit score is to know what it is.

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.

How does a credit score affect a mortgage?

The higher your credit score, the better the interest rate and terms will be on your mortgage. For example, 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. While an extra half-percentage point might not seem like much, 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.

Few of us want to flush money away, so let’s look at how you can make your credit score the very best it can be. Here are some strategies to explore.

Review your credit file

In addition to knowing your score, you’ll want to pore through your credit report. Here’s what you’re looking for: loans or credit cards listed that you never opened (it 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.

If you find any glitches, dispute it 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.

Keep tabs on your score

Whether your credit history checks out or you find errors that you need to resolve, it’s a good idea to keep tabs on your credit score. This can also serve as motivation when you see your hard work pay off when your score goes up!

You can set up credit-monitoring alerts, says Andrea Woroch, a family finance and budgeting expert.

“You can get automated updates using sites like Credit Karma,” she explains.

Dump high-interest debt

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.

On the other hand, 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.

Look at your credit utilization rate

Also, be more 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 credit score, says Anthony Marti, CEO and founder of Choice Mutual.

In other words, if your credit limit is $20,000 on your card, that is not license to go out and spend that much. Instead, you want to be tapping 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.

Don’t ignore privately held student debt

If you have student loans that are privately held, take a look at whether they are at fixed or variable rates.

“In this climate, your interest rates will rise everywhere possible,” says Michael Jeffcoat, founder of The Jeffcoat Firm. “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.

Be careful with new credit

You know when you set foot in a store and they say if you sign up for their credit card, they’ll give you a huge discount or major freebie? It might seem like a smart move, but signing up for new lines of credit can send your credit score drifting downward.

Here’s why: 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. This is especially true for people who don’t have a long credit history.

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

Understand the downside of a skinny credit file

In credit lingo, there’s 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. This might mean you have a minimal credit file.

This can be problematic since when the reporting agencies look at it, there is little or no track record that you’ve repaid your debts well. This, in turn, can drag your score downward.

If you’re in this situation, it takes time to pad out that credit file. You might start by applying for a secured credit card, which means you put down a deposit (possibly as little as $50), which acts as your credit line. Because you’re securing the credit line with your own money, credit card issuers are more likely to issue these to folks with little credit history. When the issuer reports your payments to credit-reporting companies, your score should rise.

Just remember to keep the balances low and pay on time (maybe even early). Another word of warning: Prepaid and debit cards do not function in the same way and probably won’t pump up your score.

Get a boost from a buddy

There is one time that getting an additional card can help.

“Become an authorized user on a trusted friend or family member’s credit card account,” Woroch advises, provided they have a top-notch credit history. “You will benefit from their positive money management, low balance, and on-time payments.”

Obviously, this isn’t a request to make or be granted lightly. If you are going to, say, ride on your brother’s credit coattails, you need to know he’s not lugging around a big wad of debt, and you have to be beyond responsible about using his credit.

For this and similar articles, please visit Realtor.com