Understanding Your Credit Score

Freelancers often deal with fluctuating income. This makes it tough to show the consistency lenders like to see. Traditional employees have regular pay stubs, while freelancers rely on a mix of client payments. This irregular cash flow can raise red flags for mortgage lenders.

A strong credit score is one of the most important factors when applying for a mortgage. Lenders use it to judge your financial responsibility and decide whether you’re a safe bet. A higher score can help you secure better interest rates and more favorable loan terms, saving you thousands of dollars over the life of your mortgage.

If your credit score needs improvement, don’t worry. There are several steps you can take to boost it before you apply. This article will guide you through key strategies to improve your credit score and increase your chances of getting the best mortgage possible.

Before working on your credit score, it’s crucial to understand how it’s calculated. A credit score is made up of several components, each carrying different weight:

  • Payment history (35%): The record of on-time and late payments.
  • Credit utilization (30%): The percentage of your available credit that you’re using.
  • Length of credit history (15%): How long you’ve had credit accounts.
  • New credit inquiries (10%): How many recent credit applications you’ve made.
  • Credit mix (10%): The variety of credit types you hold, like credit cards, auto loans, and mortgages.

Check Your Credit Report Regularly

Lenders typically use credit scores from 300 to 850. A score of 700 or above is considered “good” and can help you secure better mortgage terms. A score of 750 or higher is seen as “excellent.” If your score is below 620, you may have difficulty getting approved for a loan, or you might face higher interest rates.

One of the easiest steps you can take is to review your credit report. Mistakes happen, and incorrect information could be dragging your score down. Look for errors, such as late payments that aren’t yours or wrong balances. If you find a mistake, dispute it with the credit bureau to have it corrected.

Strategies to Improve Your Credit Score

There are practical steps you can take to boost your credit score before applying for a mortgage. Focusing on key areas of your credit profile will help you make progress quickly.

Pay Your Bills on Time

Payment history is the most important part of your credit score, accounting for 35% of it. Lenders want to see that you can manage your debt responsibly and make payments on time. Even one late payment can cause your score to drop significantly.

To avoid late payments, set up automatic payments for recurring bills like credit cards and loans. If auto-pay isn’t an option, use calendar reminders or payment alerts to help you stay on top of due dates. The more consistent you are with paying on time, the stronger your credit profile will become.

Reduce Credit Card Balances

Credit utilization, or the percentage of your credit limit you’re using, makes up 30% of your credit score. Keeping this ratio low is critical for improving your score. A general rule is to use no more than 30% of your total credit limit. For example, if your combined credit limit across all credit cards is $10,000, try to keep your total balance below $3,000.

To reduce credit card balances, start by paying off high-interest cards first. This will not only lower your debt but also save you money on interest. Consider making multiple small payments throughout the month to keep your utilization low. This strategy shows lenders that you’re managing your debt wisely and can help improve your score quickly.

Avoid Opening New Credit Accounts

Opening new credit accounts or applying for multiple lines of credit in a short period can hurt your credit score. Each time you apply for new credit, the lender conducts a “hard inquiry,” which temporarily lowers your score. Too many inquiries in a short period signal to lenders that you may be financially stretched, which increases your risk in their eyes.

In the months leading up to a mortgage application, avoid opening new credit cards or taking out loans. Focus on maintaining your existing accounts and reducing debt instead. Hard inquiries remain on your credit report for up to two years, but their impact lessens over time.

Keep Older Accounts Open

The length of your credit history accounts for 15% of your credit score. Lenders prefer to see a long history of managing credit responsibly. Closing old accounts can shorten your credit history and reduce your overall available credit, which may hurt your score.

If you have old accounts in good standing, keep them open even if you no longer use them regularly. These accounts contribute to the average age of your credit history and improve your credit utilization ratio by providing more available credit. Just make sure the account has no annual fees that could add unnecessary costs.

Diversify Your Credit Mix

Your credit mix, or the variety of credit types you use, accounts for 10% of your score. Lenders like to see that you can manage different kinds of credit, such as credit cards, auto loans, or installment loans. A diverse credit mix shows financial maturity and responsibility.

While it’s not advisable to open new accounts just to diversify, managing a mix of revolving credit (like credit cards) and installment loans (like car loans) can boost your score over time. Focus on paying off existing debts before taking on new forms of credit.