Improving Your Credit Score: What Hurts and How to Fix It

According to all of the economic indicators, this is one of the best times to buy a house. Mortgage rates are at a historic low and housing prices have fallen. If you are looking to buy, now could be a good time.

If you pull your credit report you may wonder what to do with the information and how to improve your score. Ideally if you are looking to obtain a new mortgage with the best rate possible then your credit score should be 750 or above. If your score isn’t that high you may be wondering how to improve it. I used to wonder the same things until I did some research. Here is some of what I learned.

Your credit score is based on many things but one area that will hurt your score is if your credit to debt ratio is bad. This is calculated a couple of different ways. For starters, you do not want any one account to have a high balance. If you have a credit limit of $5,000 you want to keep at least $3,000 available. Reporting agencies also look at your overall credit to debt ratio. For example if you have several credit cards with a total credit amount of $25,000 you will want to keep your debt to $10,000 or less for all of it. It’s actually better, for your credit score, to spread the debt out.

Another thing that will hurt your score is late payments. As much as 35% of your score can be based on paying your accounts on time. Thankfully, the more time that has passed since you made a late payment, the less it will impact your score. Many people don’t realize that this often includes utility payments. Your electric bill, cable bill etc are all often reported to credit reporting agencies.

Even asking for credit can hurt your credit score. There are two types of credit inquiries; hard and soft. A soft inquiry is when your file is reviewed but you didn’t ask for new credit. An example of this would be if your employer ran a credit check on you. Soft inquiries do no damage to your score. A hard inquiry is when you apply for new credit. Something as simple as switching from one cell phone provider to another generates a hard inquiry. While these don’t do a lot of damage their timing can be a problem if you are looking to apply for a mortgage. Even a small drop in your score, no matter how temporary, can alter the interest rate that you are eligible for when you apply for a home loan.

Start planning at least a year in advance before applying for a mortgage. Clean up your credit file, pay all bills on time and avoid hard inquiries. Then when you apply for a mortgage you will be in great shape to get the lowest interest rate possible.


Originally Published for Yahoo! Finance.