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Applying for a mortgage? How to improve your credit score and save when buying a house



Your credit score is one of the first things mortgage lenders consider when you apply for a loan. The better the three-digit number, the higher the chances of not only the loan  being approved but also getting favorable terms.

A credit score is a number between 300 and 850 that shows a consumer’s creditworthiness based on their bill payment history, current debt and other financial information. A high score, above 700, could mean lower interest rates.

Increasing one’s score by 20 points can save a borrower more than $20,000 in interest over the life of a 30-year conventional loan, according to a new analysis by Credit Karma.

We spoke to Aniva Hinduja, vice president and general manager for Home/ Mortgage at Credit Karma, on ways to improve your credit score as the spring housing market is heats up.

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Be diligent about making on-time payments

One of the most important credit factors is your payment history, making up roughly 35% of a personal overall credit rating. When it comes to payment history, it’s about demonstrating a track record of on-time payments.

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Hinduja suggests borrowers  find out when creditors report balancesto the credit bureaus.

If you wait until the due date to pay off your balance, there’s a chance the bureaus won’t receive that data until the next month. This balance could negatively impact your credit utilization, which brings us to our next tip.

Keep your credit utilization as low as possible

Most credit professionals encourage borrowers to keep their credit utilization under 30%. Credit utilization is the total amount of credit you are using divided by the total amount extended to you.

One way to lower your credit utilization is to pay down your credit balances. Another possibility, Hinduja says, is to ask your credit card issuer to increase your credit limit – the more credit you have, the lower your credit utilization ratio will be.

Before asking your issuer for a credit limit increase, confirm that they will conduct a soft credit inquiry – a hard inquiry could have a negative impact on your credit score.

Avoid closing credit card accounts

It might seem counterintuitive, but closing a credit card, perhaps one you no longer use, can have a negative impact on your credit score. For starters, closing a credit card can have a direct impact on your credit utilization ratio.

It can also reduce the length of your credit history and limit your overall credit mix, which are two primary credit factorsHinduja says.  If you have an inactive credit account, consider setting up automated payments to a recurring bill, like a streaming service, so the account remains active.

Don’t apply for other financial products

If you’ve applied for a loan or other credit before, you’ve likely experienced a hard credit inquiry, also known as a “hard pull.” Lenders do this to better understand how you’ve previously managed credit and other debts. Typically a hard inquiry can ding your credit score by a few points. If you plan to apply for a mortgage in the near term, avoid applying for other financial products, such as a credit card, or even a new phone plan, Hinduja says.

Leverage a free credit builder program

Credit-builder programs can help consumers with no credit or limited credit, and those who are trying to improve their credit scores.

In general, a lender agrees to lend a certain amount of money to the borrower and the borrower decides how much and how often they want to make payments toward the loan. As the borrower makes payments, the lender reports those payments to the credit bureaus, which can help boost their credit.

Become an authorized user on someone else’s credit card

If you have a trusted friend, partner or family member with a credit card account touting a high credit limit or solid history of on-time payments, ask if they’re willing to add you as an authorized user, Hinduja suggests.

One point of caution – if the primary user has a late or missed payment it will be added to both parties’ credit reports, Hinduja warns.

Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY.  You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.

This article originally appeared on USA TODAY: How to improve your credit score as you apply for a mortgage

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