Published August 15, 2024

Building Your Credit Score: A Guide for Aspiring Homeowners

Written by The Norman Home Team of Keller Williams Gateway

Building Your Credit Score: A Guide for Aspiring Homeowners header image.

Why Your Credit Score Matters

A good credit score is crucial for securing a mortgage, the essential financial tool for most homebuyers. This three-digit number acts as a simplified snapshot of your borrowing history, indicating how responsibly you manage debt and repay loans. For lenders considering your home loan application, a high credit score signifies a lower risk of delinquency on your future mortgage payments.

Understanding Your Credit Report

The three major credit bureaus in the United States (Experian, Equifax, and TransUnion) each maintain a credit report and credit score for you. These reports detail your credit history, including past loans, credit card usage, and payment habits. Although the scores may vary slightly between bureaus due to differing data sources, they should be generally similar. For instance, Experian might consider on-time rent payments, while TransUnion might have a more detailed employment history.

Obtaining Your Credit Report

You can access a free copy of your credit report annually from each bureau through AnnualCreditReport.com. This website is a government-backed initiative designed to empower consumers with control over their credit information. While your credit report is free, obtaining your actual credit score may require a separate fee from each bureau.

Once you have your credit report, meticulously review it for any errors, especially in the "adverse accounts" section that details late payments or other blemishes.

Evaluating Your Credit Score

A higher credit score translates to better loan opportunities and potentially lower interest rates. The Federal Housing Administration sets a minimum credit score of 580 for a 3.5% down payment on a mortgage. Many lenders have a higher threshold, often requiring at least 620 or even a higher score.

Improving Your Credit Score

If your credit report reveals room for improvement, don't despair! Here are some strategies to boost your score:

Dispute Errors: A recent study in 2024 conducted by Consumer Reports found that out of 4000 participants, almost half (50%) found significant errors on their credit report. If you discover any discrepancies, the Fair Credit Reporting Act empowers you to dispute them directly with the credit bureau. The FTC website provides guidelines for crafting a dispute letter and gathering necessary documentation to support your claim. You should also contact the creditor who provided the inaccurate information and request that they update the bureau with the correct details. While this process may take time and require some effort, successfully removing erroneous information can significantly improve your score.
Address Past Mistakes: Everyone makes mistakes, and credit reports reflect late payments or missed payments. For isolated incidents, consider contacting the creditor responsible for the negative mark and inquire about having it removed from your report. Sometimes, creditors are willing to work with borrowers to rectify past mistakes, especially if the late payment was an isolated incident.
Increase Credit Limits: While not a magic bullet, strategically increasing your credit limits can improve your credit utilization ratio. This ratio compares your total outstanding debt to your total available credit. A higher credit limit increases the denominator in this ratio, potentially improving your score. For example, owing $1,000 on a credit card with a $1,500 limit reflects a higher utilization ratio compared to owing the same amount on a card with a $5,000 limit.
Pay Bills on Time: Making consistent, on-time payments is the single most impactful factor influencing your credit score. Consider setting up automatic payments to ensure you never miss a due date.
Self Report Payments: Not all companies report payment history to the bureaus due to the high costs associated with this service for companies. There are several companies that offer low cost reporting programs for individuals to allow them to report the payments that are missing. Here are a couple of companies that provide this service: Rent Reporters, Rock The Score, and Self. (We have no affiliation with any of these services.)
Be Patient: Unfortunately, negative items like late payments can linger on your report for up to seven years. The good news is that positive credit behavior has a faster impact. Consistent on-time payments significantly contribute to the "payment history" section of your credit report, which holds the most weight (35%) in determining your overall score.

By following these steps and allowing sufficient time for your positive credit habits to be reflected in your report, you'll be well on your way to achieving a credit score that positions you for homeownership success.

We’ve helped hundreds of clients sell and buy with great success. If you're thinking about buying or selling and would like a no-obligation consult to see how we can serve you, contact The Norman Home Team at 443.489.5225 or visit our website for information on all the services we provide.