You pay your credit cards on time (most of the time), don't have large balances (except for one card), rarely get charged a late fee (except for the last couple of months), etc. Does this sound like you? Most everyone has made a late payment on their credit card or let the balance get out-of-hand by making the minimum monthly payment. Let's look at some tips for improving your credit score so you can buy a home.
Understanding how your credit card habits affect your credit card score will help you make changes to improve your score. If you're trying to buy a house, a high credit (FICO) score will save you money and earn you a better interest rate. Imagine saving more than $50,000 over the life of your mortgage?! Let's take a look at 5 ways you can improve your score.
- Ask to have a late fee forgiven
- Pay credit card balances down to <30%
- Pay off maxed-out credit cards
- Charge something on rarely used cards
- Keep credit cards with high credit limits
1. Ask to Have Late Fee Forgiven
It happens, you're doing something unrelated and suddenly realize you forgot to pay your credit card bill. You've been issued a late fee which will negatively affect your credit score. It's important to make a payment immediately then contact your credit card company. If you're in good standing with them, they may forgive the late fee.
My credit card company recently waived a late fee for me. They told me, if I wanted to have another late fee forgiven in the future, I would have wait 6 months. Good to know. Call your credit card company to see what options you have to save on late fees and protect your credit score. Some credit card companies will request you pay your bill and sign up for automatic payments, before they'll waive the late fee. This provides more security and less administrative work for them.
2. Pay Balance Down to <30%
Paying credit card balances down to a credit utilization rate of <30% will improve your credit score too. If you've got 2 cards with a low balance, one with a $10,000 credit limit and another with a $5,000 limit, the first card is more in your favor because lenders look at your per-card utilization rate. For example, if you have a $100 balance with a $10,000 credit limit, the per-card utilization rate is only 1% (highly favorable). If the same card had a $9,000 balance, the rate would be 90% (unfavorable). You want a rate below 30%, as recommended by FICO.
3. Pay Off Maxed-Out Cards
Paying off maxed-out cards will have the most positive impact on your score because credit bureaus look at your credit-to-debt ratio. The less debt you have, the better your score.
4. Charge Rarely Used Cards
If you have a rarely-used credit card with no balance, start using it for small purchases then pay it off right away. This is an easy way to build up your credit score. One exception: a rarely-used card with a high credit limit (see below) -- keeping this card and not using it will help your score.
5. Keep Cards With High Credit Limits
Your credit card's limit can affect your score too. As mentioned earlier, your credit utilization rate affects your credit score so keeping cards with high credit limits will play in your favor, if your balance isn't high.
As you can see, there are many ways to improve your credit score to help you qualify for better rates and lower finance charges when the time comes to apply for a mortgage. Start paying down the balance on your credit cards, avoid late fees, and ask for lower interest rates. When the time comes to apply for a home loan, you'll be glad you applied these suggestions. You might even qualify for a higher priced home.
To learn more about improving your credit score, visit our Finance Pillar Page.