How to repair your credit score in 6 steps

A great credit score gives you several advantages when you’re ready to buy a home, including access to lower-interest mortgage rates. On the other hand, a lower credit score might have negative implications during the home buying process.

The credit score required to buy a home depends on the type of loan you’re applying for, but the higher your score is, the easier it will be to get a mortgage loan in general. This is why it’s important to repair your credit score before you embark on the home buying process.

Before we provide a background on credit scores and how they work, here are some tips to help you fix your credit score, which we’ll discuss in more detail later.

6 Tips to fix your credit score: At a glance

1. Check your credit report often and look for errors.
2. Focus on small, regular payments and control your spending.
3. Reduce your high-balance accounts and use credit cards sparingly.
4. Consider a debt consolidation loan.
5. Work with a credit counseling agency or credit repair company.
6. Build toward a target credit score.

What is a credit score?

A credit score is a numerical rating that tells a lender how responsible you are when you borrow money. High credit scores tell lenders that you pay your bills on time and you don’t borrow more money than you can pay back.

On the other hand, low credit scores indicate you may be a credit risk. Lenders see that you may sometimes miss payments, you might overextend your line of credit regularly, your account is very young or your spending habits are unpredictable.

Equifax^®, Experian^® and TransUnion^® are the three major reporting bureaus that gather data on your spending habits and calculate a score for you based on your unique spending and bill-paying habits.

Each bureau can play a role in how your credit history is assessed. Mortgage lenders will often order what is called a tri-merge credit report, combining all three reports into one, to help assess how qualified you are for a mortgage.

How Can You Learn More About Your Credit Score?

Your credit score can be found in a variety of ways. You may purchase it from one of the three major credit reporting bureaus: Experian^®, Equifax^® or TransUnion^®. There is also a good chance that your credit card company or bank offers free credit scores, either available on your statements or upon inquiry.

Though your annual free credit report will not include your credit score, it provides in-depth information essential to improving your financial situation. Under the Fair Credit Reporting Act (FCRA), you’re entitled to a free pull of your credit report from each of the three major credit reporting bureaus once every 12 months or more often if you meet certain requirements. You can view your credit report by visiting AnnualCreditReport.com and requesting your free credit report.

How Is Your Credit Score Determined?

Your credit score is a combination of data from all three of the credit reporting bureaus. Each bureau may give you a slightly different score depending on which lenders, collection agencies and court records report to them, but your scores should all be similar.

The following is a rough breakdown of how credit scores are calculated:

• Payment history (35%): Your payment history includes factors like how often you make or miss payments, how many days on average your late payments are overdue and how quickly you make an overdue payment. Each time you miss a payment, you hurt your credit score.
• Current loan and credit card debt (30%): Your current debt comprises factors like how much you owe, how many and the types of cards that you have, and how much credit you have available. Maxed-out credit cards and high loan balances hurt your score, while low balances raise your score – assuming you pay them off.
• Length of your credit history (15%): The longer your credit history, the higher the probability that you’ll follow the same credit patterns. A long history of on-time payments improves your score, so it can sometimes be beneficial to leave accounts open if you’ve paid them off.
• Account diversification (10%): Creditors like lending to borrowers who have a mix of account types, including home loans, credit cards and installment loans.
• Recent credit activity (10%): When you open several cards or request a sudden increase in credit, creditors may believe that you’re in financial trouble. Don’t apply for multiple accounts at once, or your credit may take a hit.

How to repair your credit to buy a house

If you have a low credit score, don’t panic. Your credit is something that you control, and you can change your score for the better.

After you know your score and understand how it’s calculated, here are some steps you can take to repair your credit:

1. Check your credit report for errors

Many people live with errors on their credit report and don’t even know it. These errors are rarely beneficial and can lower your score.

Some of the most common errors include:

• The inclusion of accounts that don’t belong to you
• A report that a closed account or a paid-in-full loan is still open
• A report that inaccurately lists a missed or late payment
• The inclusion of outdated credit utilization information

Before you start a credit repair plan, make sure that your low credit score isn’t the result of a mistake. Pull each of your credit reports and carefully check each one for errors. Your credit reports include instructions on error reporting processes.

If you do notice something that you believe is an error, your credit bureau must investigate any dispute that you make and report their findings back to you. If credit bureaus find that what you’ve reported is actually an error, they remove it and raise your score.

2. Focus on small, regular payments

Your payment history is the biggest single factor that makes up your credit score because it comprises about 35% of your score’s calculation. This means that one of the quickest ways you can raise your score is to make minimum payments on all of your accounts every month.

Ideally, you should also pay off each of your outstanding credit card balances before they’re due. This lowers your revolving utilization and helps you save on interest in the long term.

Most credit card companies allow you to set email or SMS alerts to get a notification when a minimum payment is due soon, and you can even schedule automatic payments in advance with most credit cards so you never miss a payment date.

If you have cards open but you don’t use them, resist the temptation to close them. Closing credit lines lowers your available credit and increases your revolving utilization percentage. Instead, charge a small item – like a cup of coffee or a dinner – once a month and pay your bill off immediately.

3. Reduce your high-balance accounts

You’ll see your credit score rise if you reduce the amount you owe on your credit cards. Your revolving utilization makes up 30% of your credit score, so it’s worth it to put any extra money in your budget toward debt reduction.

Sit down with your credit statements and make a list of everything that you owe and remember to include each one of your cards on the list. Then, take a look at your budget and look for places where you can afford to cut back.

Finally, avoid spending extra money on your credit cards if at all possible while you reduce your debts.

4. Consider a debt consolidation loan

A debt consolidation loan (typically a personal loan) or balance transfer takes all of your outstanding debts on different accounts and combines them into a single monthly payment.

This may help improve your credit utilization rates and can help you avoid missed payments. A debt consolidation loan or balance transfer can be a great option for you if you have multiple lines of credit that you have trouble keeping up with.

You make a hard inquiry on your credit report when you apply for a debt consolidation loan, so your credit score will usually drop by a few points immediately after your inquiry. Focus on making on-time payments above the minimum required amount after you get your debt consolidation loan to make up for this effect.

5. Work with a credit counseling agency or credit repair company

Credit counseling agencies are companies that can help you analyze your finances and find realistic solutions for your debt and credit issues. Credit repair companies, on the other hand, look at your finances and suggest opportunities where you can save. They may also contact your creditors on your behalf and negotiate your payment amounts.

If you decide that you want to work with a credit counseling agency, or alternatively look into a credit repair company, be picky with your selection. Ask about fees, specific pricing, services and products and avoid companies reluctant to provide upfront information on their pricing structures or debt-reduction tactics.

You can find affordable and reputable assistance from a nonprofit credit counselor through the National Foundation for Credit Counseling.

6. Build toward a target credit score

Once you know your score and the steps you’re willing to take to repair it, you can then decide on a plan to see how aggressively you should try to improve your score.

While ranges will vary slightly between the FICO^® and VantageScore^® 3.0 score models, 850 is the highest possible credit score for both.

How long does it take to fix your credit to buy a house?

If you’re curious about how to fix your credit to buy a house, you might have your eye on a relatively immediate prize. Unfortunately, it takes time to repair your credit.

Most creditors report to credit reporting agencies on a monthly basis (or sometimes less). Because of this, it can take 30 days or more for your account statuses to change if you reported an error.

If you’re actively working on building your credit, it can take even longer to see a difference.

Stick with it, though. Whether your goal is to repair your credit to buy a house or you just want to see how high you can get your score, working on your credit is always a smart move, regardless of how long it takes.

The bottom line: Repairing your credit score takes work

Whether you’re looking to finance a home or take out another type of loan, it’s a good idea to try to repair your credit. Fixing your credit score doesn’t happen overnight, but there are plenty of small steps you can take every day to fix and maintain a solid credit score.

Ready to get started on your home buying journey? Begin the approval process with Rocket Mortgage^® today.