5 tips to improve your credit score in 2021

Ellen Sinkey PHOTO CREDIT: Contributed

If 2021 is the year you’re going to make the leap to become a first-time homebuyer, we’re rooting for you.

Maybe you’ve gotten sick of quarantine and are considering purchasing a vacation home, or a larger home for your family.

Whatever the case might be, remember that the initial step is to get pre-approved for a home loan. To do that, you’ll want to get a handle on your credit history and credit score. The key factors that make up a credit score are:

• Payment history.

• Total amount owed.

• Length of credit history.

• Types of credit in use.

• New credit accounts.

If your credit is less than perfect, non-existent or otherwise holding you back, it might be time to consider some ways to increase your score. Improving a credit score takes time, effort and focus. To help, we’ve pulled together five tips on how to improve your credit score before applying for a home loan.

No credit = no good

Sometimes a lower credit score is given simply because a person has no credit history to base a score on. Some people are adamant that it’s not a good practice to borrow money. If you haven’t borrowed any money for a student or car loan and you haven’t opened any credit card accounts, there’s no history to make up your credit report. Having no credit can make a lender hesitant to work with you.

If you’re hoping to qualify for a mortgage down the road, you’ll want to rectify that sooner rather than later. Open a credit card or two and make a few purchases on those cards so that you start building a record of using credit and paying it back on time. In time, being diligent with payments on those cards can show a potential lender that you are a responsible borrower and a good prospect for a home loan.

Be smart about credit

Being responsible about using existing credit is the best way to improve your credit score.

For example, if you have a charge card for a retailer or bank that offers travel points, use it on purchases to gain points and rewards. Keeping the balances low (well under 30% of your credit limit) and consistently paying off those purchases every month will create a history of responsible credit behavior that will go a long way toward improving your credit score.

Although the standard “rule of thumb” is not to use more than 30% of your allotted credit line, aiming to use no more than 10% is best. It shows that you won’t misuse your credit and fall into debt.

Keep in mind that maxing out a credit card can hurt your score even if you pay it off in full every month. This is especially true on a card with a low credit limit, so know the credit limits on each account you have.

Make a plan to reduce (or eliminate) debt

It doesn’t take long for a little bit of debt to become a serious long-term problem. Paying for something like a vacation with revolving debt — like the kind you get with many credit cards — can take years to pay off. That’s not something you want on your credit report if you’re looking to buy a home.

Many people drowning in debt try increasing their minimum payments by a small amount across all their accounts, but that barely moves the needle. Instead, it might be better to focus on one account at a time. If you make a significantly bigger payment to only one account each month until that debt is completely repaid — while making the minimum payment on all other accounts — you’ll notice the debt shave off more substantially.

When one is paid off, leave it be (remember, don’t close it) and repeat with your next account. Keep it up until all your debt is paid down.

Look for lower interest rates

Another thing you can do to reduce debt is to ask for a lower interest rate.

The chances are that you opened a credit card account or bought a car when interest rates were higher. Because so much of your monthly payment goes toward interest and not the balance, higher interest rates keep you in debt longer. It’s a well-kept secret, but some lenders can and will renegotiate interest rates.

Just be forewarned: Customers who’ve paid on time every month are more likely to cut a deal on getting a lower rate.

It also pays to keep an eye out for promotions offering lower interest rates. Balance transfers (from one card or one bank to another) can often get you a lower rate, but be cautious: Promotional rates often have expiration dates. Try to pay off any balances before the promotional period ends or you might be subject to higher interest rates after that.

Don’t close accounts in good standing

If you have outstanding balances on credit cards, car loans or student debt — but they’re in good standing and you’ve been making your monthly payments — keep it up.

Regular, on-time payments are the solid foundation for a great credit score. If you’re thinking of paying off a balance entirely and closing an account, you might want to hold off.

Credit bureaus — the businesses that create credit reports — love when borrowers have zero-balance accounts. It shows that even though you have credit available, you’re responsible enough not to use it. While getting rid of an account might sound like a good idea, it could hurt your credit score. Keeping an active account open with no balance looks better than having a closed account.

Ready to buy a home now?

There are many great federal financing programs available for first-time homebuyers, including FHA, VA and USDA loans. Conventional mortgages from Fannie Mae and Freddie Mac or home renovation loans are great options. Many cities offer first-time buyer programs for down-payment, financing and closing cost assistance. Contact a local lender to learn more.