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How to Improve Credit Score?

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A good credit score could save you tens of thousands of dollars if you are planning to buy a house with a mortgage. There are a few major things mortgage lenders check when you apply for a mortgage, such as income, debt, and credit score.

Why is a credit score important?

All mortgage lenders check a borrower's income to decide whether or not the borrower is able to pay the mortgage, and they check the borrower's credit score to determine what interest rate they should charge. Borrowers with a high credit score are safer bets for the banks because these borrowers have a proven track record of paying back. A borrower with a low credit score is risky to the lenders because these borrowers are more likely to default and walk away from paying back the mortgage than the ones with a good credit score. Therefore, mortgage lenders charge a higher interest rate to justify their risk in granting loans to borrowers with a low credit score.

5 Ways to Improve Your Credit Score

Here are 5 ways to improve your credit score. There is really not a shortcut to improve your credit card fast. It takes time to build a good credit history.

  • 1. Always pay your bills on time - Make sure you never make a late payment on your credit card payments. Because if you do, you may knock off 50-100 points on your credit score depending on your current credit score.

    If you have a good credit score, it would knock off more points than if you have a low credit score. Set up automatic payment if you have to so that you never miss a bill payment.

  • 2. Keep credit card balance low - Make sure to keep each of your credit card balances to be 30% or lower. For instance, if your credit line is $10,000 on a card, the maximum balance that you carry on that card should not exceed $3,000.

    If you ever exceed or close to that amount, just pay it off first before you continue to use it. You don't need to wait for your credit card statement to come before you make payment. You can always make a partial payment or the full payment at any time during the month to keep your balance lower than 30% of your credit limit.

    Most credit card companies allow you to pay online at your own convenience, so there is no reason for you to wait for the statement before making a payment.

  • 3. The total balance of all your credit cards should be under 30% - If you have more than one credit card, the total balance should not exceed 30% of your total credit line. For instance, if you have three credit cards, each with a $10,000 credit line, your total credit line would be $30,000. The total balance across all your credit cards should not exceed 30% of $30,000, or $9,000.

  • 4. Don't open too many credit cards - The optimal credit cards that you have should be around 3-5. It is true that you need to open accounts to build credit, but having too many credit cards may backfire and hurt your credit score. Don't open any credit card from retailers just because you can get a 25% discount on your first order. Only open a credit card when you absolutely need it.

  • 5. Don't close old credit cards - Closing an old account will hurt your credit score. The older the credit history, the better it is for our credit score. If you don't have to pay annual fees, there is no good reason to close it. Some credit card companies will cancel your credit card if you don't use it for a very long time. For this reason, you may want to use that old credit card once in a while just to keep it alive. Just don't forget to pay off the balance.

What credit score is needed to buy a house?

You don't need a very high credit score to buy a house. For conventional mortgages, a credit score of 620 is good enough. However, just because you can get a mortgage doesn't mean you will get a good interest rate. A credit score of 620 is lower than the average, and you will likely have to pay a higher interest. As we stated above, the higher the credit score, the less you pay in interest.

Things to Watch Out For When You Are Approved For a Mortgage

If you just got approved for a mortgage, don't rush out to spend money on furniture, or buying a new car on a loan. Doing a lot of shopping will increase the balances on your credit cards and may even impact your credit score. Your mortgage lender may decline your approved mortgage or raise its interest rate. Therefore, you should not apply for additional loans or buy things that may add balances to your credit card. Hold off until you move into your new house.


Not only do mortgage lenders check credit score, if you apply for any other kind of loan, such as a car or personal loan, lenders also check your credit score to determine whether or not you qualify for the loan and at what interest rate. A one-point interest difference may not seem like a lot, but it makes a huge difference if your interest rate is 1% lower on a 30-year loan. The savings on interest could be in the 50k-100k range depending on the mortgage amount and other terms.

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