How To Improve Your Credit Score To Buy a House

When you’re ready to buy a house, you need a few crucial things. They include money for a down payment, a savvy real estate agent, the number for a good moving company, and, perhaps most importantly, a credit score good enough to qualify for a mortgage.

Taking time to improve your credit score can help you qualify for a home loan — and qualify for better rates and terms, potentially saving tens of thousands of dollars in interest over time.

This guide will explain how to improve your credit score to buy a house. 

Steps to improve your credit score before buying a house

Improving your credit score is not typically an overnight process. The steps to improve your credit score take time. Ideally, you should start working to improve your credit at least six months before you begin looking for a house, or even longer if your score needs a lot of improvement.

Here's how to take action: 

1. Make on-time payments on all your debts

Payment history is the most important factor affecting your credit score. It makes up 35% of your overall FICO score, more than any other category. By paying all your debts on time, from student loans to credit cards, you show lenders that you’re responsible when you borrow money.

Unfortunately, a single payment that's 30 days late could lower someone's credit score between 20 to 80 points, according to FICO, depending on the person's overall credit profile and their credit score before the missed payment. To avoid missing payments, set up autopay, put reminders in your phone, or write it on your calendar in bright-red ink — whatever works best.

2. Pay down credit card debt

Carrying a balance on credit cards increases your credit utilization ratio, which measures how much of your available credit you’re using. Credit utilization factors into the amounts owed category of your FICO score, which is the second most important category in the FICO scoring model (30%). A high credit utilization ratio can lower your overall score. 

Paying down as much of your debt as possible and focusing on getting your utilization ratio into the 10% to 30% range can make a big impact on improving your credit. It can also help your debt-to-income ratio (DTI), another factor that can affect your mortgage eligibility. Mortgage lenders typically prefer a DTI below 43%.

Just don’t start racking up credit card debt after a mortgage pre-approval, as taking on new debt at that point could jeopardize your ability to close on your loan. 

3. Ask to raise your credit limits

Requesting a credit limit increase on one or more cards can also improve your credit utilization ratio, and can do so much more quickly than paying off debt.

If you have a $1,000 balance on a credit card with a $2,000 limit, your credit utilization is 50%. If your credit card company raises your limit to $5,000, but your balance stays at $1,000, your utilization is now only 20%.

You need to be careful with this strategy, though. While many credit card companies will raise your credit limit with only a soft inquiry, some lenders may perform a hard credit inquiry. A hard credit check can temporarily lower your score. If you’re requesting a credit limit increase specifically to improve your credit, always ask about the inquiry process before moving forward.

4. Dispute errors on your credit report

Credit scores are generally calculated based on the information in your credit report. This means a mistake on your credit report could hurt your score and affect your eligibility for an affordable mortgage.

Check your credit report, which you can do for free, at AnnualCreditReport.com. If you identify an error, dispute it online with each of the major credit reporting agencies. 

The Federal Trade Commission (FTC) also recommends writing letters to the credit bureau and the business involved. The FTC has a full guide to disputing errors on your credit report to get you started, as well as a template for the credit bureau letter and a template for the letter to the business.

5. Avoid taking out new credit

Taking out any kind of loan or new line of credit usually triggers a hard credit inquiry that can temporarily lower your credit score. The reduction in your score isn't substantial. It's usually less than five points for only a year, but even a small hit to your score can affect your ability to qualify for the most affordable mortgage.

Opening multiple lines of credit in a short span of time can also be a red flag to lenders, as it indicates your finances might not be stable. Make a point to avoid taking on new debt when you're hoping to borrow for a home soon.

6. Keep legacy credit lines open

The average age of your credit also impacts your credit score. Responsibly managing credit for a long period of time shows lenders you can be trusted with their money. That’s why it’s important to keep old lines of credit open, even if you don’t need them anymore.

Maintaining the average age of your credit accounts can be especially important before buying a house. If you want to close a credit card because of its annual fee, hold off until you’ve closed on your home. That card is helping your credit score in the interim and could be worth the cost of an annual fee.

What affects your credit score when buying a house?

FICO has a complex algorithm to calculate your credit score, but it all boils down to five core factors, each with a different scoring weight:

1. Payment history (35%)

Making payments on time, every month, has the biggest impact on your score. If you make all your debt repayments on time for several years, it can go a long way towards earning a great score.

2. Amounts owed (30%)

Amounts owed include credit utilization, which refers to how much of your available credit you’re using. For example, if you have a borrowing limit of $50,000 across all your cards, carrying a balance of $40,000 means you’re using 80% of your available credit. High credit utilization can hurt your score.

Experts often advocate to keep your credit utilization below 30%. You can lower your credit utilization by paying down credit card debt and/or asking for a credit limit increase.

3. Length of credit history (15%)

Everything gets better with age, including your credit score (generally). 

The average age of your credit accounts makes up 15% of your credit score. If you’ve responsibly managed credit accounts for a long time, that’s a good indicator that you’ll continue to manage new credit responsibly.

This isn’t a factor you can change to improve your score (unless you’ve got a time machine!). However, you can hurt your score by closing long-term credit accounts, which lowers your average age of credit.

4. Credit mix (10%)

Lenders like to see that you can responsibly manage a wide variety of credit, such as installment loans (like car loans, personal loans, and student loans), revolving credit (like credit cards and home equity lines of credit), and even retail accounts.

5. New credit (10%)

You face a catch-22 when it comes to the part of your credit score that involves new credit. Opening a new credit account can improve your credit mix, and managing it responsibly can boost your score in the payment history and amounts owed categories. However, your score can also drop (slightly) every time a lender runs a hard inquiry to approve you for new credit.

That slight drop is usually worth it in the long run, as long as you manage the new credit responsibly. But if you open too many new credit accounts in a short period, that’s a red flag to lenders.

Which mistakes should you avoid?

The steps to improve credit before buying a house are fairly straightforward: Make on-time payments, pay down your debt, and don’t take out new credit if you don’t have to. 

But as clear as the path may seem, you can easily slip up along the way. You should make sure to avoid these common mistakes.

Thinking pre-approval is the finish line

“The biggest mistake that I come across in terms of credit is where buyers consider pre-approval to be the end goal, rather than the beginning point,” advises Alexei Morgado, a Florida-based Realtor and the founder and CEO of Lexawise, a real estate exam prep company. 

“Once buyers are pre-approved, they [sometimes] believe they are safe to make other normal choices, such as borrowing money to purchase furniture, signing up for store cards, financing appliances, [or] charging moving expenses to credit cards.”

Unfortunately, all of those actions can impact your credit score and debt-to-income ratio, Morgado explains. Mortgage pre-approval is not a 100% guarantee, and lenders will check your credit again before final approval. Until you have closed on your loan, try to avoid any major financial changes.

“In my opinion, the best course of action here would be to keep your credit report frozen,” Morgado adds.

Forgetting about your down payment

Improving your credit to qualify for a more affordable home loan is a smart move. However, it’s only one part of making yourself a qualified buyer. You also need to save for a down payment. And sometimes those two goals can be at odds.

For example, paying off large amounts of debt to improve your credit utilization is one of the best ways to improve your credit score. However, if doing so wipes out your savings, you won’t have any money for a down payment.

Ideally, you should make a monthly budget that allows you to direct some of your discretionary funds toward lowering your credit card debt and some to a high-yield savings account for your down payment.

Ignoring bills you don’t think impact your credit score

Making on-time payments is the single most important way to improve your credit score or maintain a good score. Payment history makes up 35% of your FICO score, the most commonly used credit scoring model.

That means you should prioritize paying bills like your credit cards, car loan, student loans, personal loans, and your current mortgage on or before their due date. But that doesn’t mean you can blow off other bills in the meantime.

While most utility companies don’t report payment history to the credit bureaus, they may send your account to a collection agency if you fall behind on payments. This most likely will show up on your credit report and negatively affect your credit score.

In the past, buy now, pay later (BNPL) was a way for consumers to borrow without affecting their credit score. However, FICO has developed new scoring models that consider BNPL payments. You must be sure not to fall behind on BNPL payments when trying to increase your credit score.

How long does credit improvement take?

Improving your credit score typically takes time. Improving it substantially, by 25, 50, or even 100 points, can take even more time. 

In fact, if you dispute an error on your credit report, it can still take months to improve your score. Credit reporting agencies generally have 30 days to investigate after they receive a dispute. If your dispute is successful, it could take another 30 or more days for the removed negative mark to affect your score.

Still, while any changes can be slow to impact your score, you should generally start to see an improvement within a few months, depending on the strategy you use.

“You can make some pretty significant jumps when the main issue is revolving debt. Specifically, going from credit utilization higher than 70% to lower than 30% can be quite a jump in a short amount of time,” says R.J. Weiss, certified financial planner and founder of The Ways to Wealth. 

“The problem is when you’re dealing with other issues, such as missed payments or collections. Those can stay on the report for up to seven years, so they take longer to course-correct. That doesn’t mean someone has to wait seven years to improve their score, but it does mean the improvement is usually more gradual.”

The slow process means you should start working on improving your credit score months before you start house hunting. 

“If someone needs to buy soon, I’d focus first on the things that can move the fastest, such as correcting errors, lowering revolving balances, and avoiding new debt,” says Weiss.

Why does credit matter for mortgages?

When getting a mortgage, your credit is important for the lender and for you. Here’s why:

Why lenders care about your credit score

Your credit score is important because it helps a lender assess risk. 

A good or better credit score tells lenders you’re more likely to pay your bills on time. For a lender, that’s crucial as lenders want to make sure you’ll pay back what you borrow, plus interest.

On the flip side, a lower credit score indicates that you may have had some financial trouble in the past. Maybe you’ve made late payments, didn't pay your debt at all, or took on too much debt. These red flags can make you appear risky, so lenders may offer you a higher mortgage rate or choose not to lend to you at all.

Why borrowers should care about their credit score

Your credit score impacts more than whether you'll get approved to borrow. It's also a key factor in determining what mortgage rate you’re offered. The better your credit score, the lower the interest rate you’ll generally be offered.

And a lower rate is important. Dropping your rate from 6.5% to 6.25% on a $300,000, 30-year mortgage could save you more than $17,650 in interest over the life of the loan. Use a mortgage calculator to see how much you can save by qualifying for a lower interest rate.