If you’re looking to purchase your first home but find your credit score is holding you back from getting the best mortgage options, don’t worry!
There are practical steps you can take to speed up and boost your credit score. At Effortless Mortgage, we understand the importance of having a good credit score, and we are here to help you achieve it.
Let’s dive into five effective strategies to improve your credit score quickly.
1. Pay Down Credit Cards
One of the most effective ways to boost your credit score is by paying down your credit card balances. Here’s why:
- Impact on Credit Score: Revolving credit, like credit cards, significantly impacts your credit score more than installment loans such as car loans or personal lines of credit.
- Utilization Ratio: Aim to use only 30% to 50% of your credit limit. For instance, if your credit card limit is $1,000, try to keep your balance below $300 to $500.
- Immediate Effect: Paying down your credit cards can quickly improve your credit utilization ratio, which is a crucial factor in calculating your credit score.
Example Scenario:
Sarah is a first-time homebuyer with a credit card limit of $5,000. Her current balance is $3,500, which puts her utilization ratio at 70%. By paying down her balance to $2,000, she reduces her utilization ratio to 40%, leading to a quick boost in her credit score.
However, there are times, that you need a mortgage while your credit score needs work. Check out our blog: How to Get a Mortgage with Bad Credit
2. Limit Use of Credit Cards
It might be tempting to use your credit card for most purchases, but it can affect your credit score if not managed wisely. Here’s what to keep in mind:
- Avoid Large Balances: Racking up a large balance and then paying it off in installments can hurt your score.
- End-of-Month Balances: Even if you pay off your balance in full every month, if you have a high balance at the end of the month, it can negatively impact your score. Credit scoring formulas often don’t consider that you might pay off the balance next month.
- Consistent Payments: Try to make multiple payments throughout the month to keep your balance low, rather than waiting until the end of the month.
Example Scenario:
John, a homeowner looking to refinance his mortgage, regularly charges $2,000 each month on his credit card and pays it off at the end of the month. By spreading his payments throughout the month and ensuring his balance is below $1,000 at the end of each billing cycle, John can improve his credit score.
Find more details here on Mortgage Refinancing.
3. Check Credit Limits
Ensuring your credit limits are reported accurately can make a significant difference in your credit score. Here’s why:
- Updated Information: Sometimes, lenders don’t report your maximum limits, leaving the credit bureau to only use the balance on hand.
- Perception of Usage: If you regularly charge the same amount each month (e.g., $1,000 to $1,500), it might appear that you’re maxing out your cards, even if you’re not.
- Statement Periods: Pay down your balances or pay them off completely before your statement periods close to ensure a better credit utilization ratio is reported.
Example Scenario:
Emily, a prospective homebuyer, notices her credit report shows a credit card limit of $3,000, but her actual limit is $5,000. She contacts her credit card issuer to update the limit with the credit bureau, which improves her credit utilization ratio and boosts her score.
4. Keep Old Credit Cards
Older credit is generally better for your credit score. Here’s how to leverage your older credit cards:
- Active Accounts: If you stop using older credit cards, issuers may stop updating your accounts, which can reduce their weight in the credit formula.
- Periodic Use: Use these older cards periodically and then pay them off to keep them active and valuable to your credit history.
- Credit Age: Keeping older accounts active increases the average age of your credit accounts, which positively impacts your credit score.
Example Scenario:
Mark, a homeowner planning to buy an investment property, has an old credit card with a $10,000 limit that he hasn’t used in years. By making a small purchase and paying it off immediately, Mark keeps the card active, which helps maintain a strong credit history and improves his credit score.
Interested in property investing? Check out our blog: The Ultimate Mortgage Guide to Buy Rental Property in Canada
5. Don't Let Mistakes Build Up
Mistakes on your credit report can significantly affect your credit score. Here’s how to handle them:
- Dispute Errors: Always dispute any incorrect information on your credit report. For example, if there’s an incorrect cell phone bill that a company won’t change, you can dispute it with the credit bureau.
- Monitor Regularly: Regularly check your credit report for any errors or discrepancies.
- Address Delinquencies: If you have missed payments due to job loss, divorce, illness, or other reasons, your Effortless Mortgage advisor can help address these concerns. We can refer you to other professionals if needed to help get your credit situation back on track.
Example Scenario:
Lisa, a first-time homebuyer, finds an error on her credit report showing a late payment she never made. She disputes the error with the credit bureau, gets it corrected, and sees an improvement in her credit score, making her eligible for better mortgage rates.
For homebuyers, check out our blog: 8 Steps to Stress-Free Home Buying for First Time Home Buyers
In Conclusion:
Improving your credit score doesn’t have to be a slow or daunting process. By following these five steps, you can make significant progress quickly. Remember, a better credit score opens doors to better mortgage options and financial opportunities.
At Effortless Mortgage, we’re here to help you every step of the way. If you have any mortgage questions, don’t hesitate to reach out. We’re available seven days a week, and our live chat on effortlessmortgage.ca is always open for you.
Boost your credit score today and move one step closer to your dream home!
