When it comes to shopping for a mortgage to buy a house, one critical factor to check is your credit score. Lenders use your credit score (aka FICO score) to decide whether to loan you money to buy a home and at what interest rate.
“Lenders grant credit based on their confidence you can be trusted to pay back what you borrowed,” says Stephen Rosen, head of sales at mortgage company Better. “If you are worthy of a lender’s financial trust, you are said to be creditworthy, or to have ‘good credit.’ Building credit is almost like building a reputation with lenders.”
Credit scores range from 300 to 850. While the definition of good/bad credit varies slightly from creditor to creditor, here’s a general rundown:
- Excellent credit score: 750–850
- Good credit score: 700–749
- Fair credit score: 650–699
- Poor credit score: 649 and lower
Unfortunately, it’s easy to make mistakes that lower your credit score and jeopardize your odds of getting a home loan. Here are the five worst credit mistakes a homebuyer can make—plus how to turn things around and get your credit back on track.
1. History of late or missing payments
Whether or not you’ve paid your bills is a top concern for lenders. As such, your payment history makes up 35% of your credit score. Late payments, missed payments, and loan defaults like tax liens take a heavy toll on credit. Even worse, if you have not made a payment on your credit card debts for a while—six months or more—your creditor can “charge off” your account as uncollectable and sell it to a collection agency.
The obvious fix here is to pay off your debts on time or by remembering your monthly payment.
“Generally speaking, what helps build credit is paying your balance on time,” says Ace Watanasuparp, national director of strategic sales for Citizens Home Mortgage. “Set up automatic payments to ensure that you never miss one, and if you have the funds, set up the automatic payments a day or two before the due date.”
If auto-paying isn’t your thing, set calendar reminders for each bill’s due date to make sure everything gets paid on time, Rosen suggests.
2. High credit balances
Your debt load makes up 30% of your credit score. As such, carrying a high credit card balance can also drag down your score.
Ideally, you want your credit utilization—the amount of debt you have compared with your credit limit—to be low, about 30% to 40% of your credit limit. So if you have a $5,000 credit limit, using $2,000 a month rather than maxing out the whole $5,000 will help you build a better credit score.
“The lower your outstanding balances, the better your credit score,” Rosen adds. He suggests setting up credit card alerts so you can keep up with how much of your credit limit is being used.
3. Short or spotty credit history
The length of your credit history makes up 15% of your score. And the longer your accounts remain open, the better. This includes your credit cards, student loans, car loans, or rental history.
“Lenders will want the client to have more than 24 months of credit history,” Watanasuparp says.
If you have old credit cards that are still good but you don’t use them, don’t close those accounts. Closing paid-off credit cards can actually harm your credit score, as it reduces the overall length of your credit history.
“It’s better to keep it open and use the credit line from time to time than closing the credit card,” Rosen says.
4. Limited mix of credit
Credit mix is the variety of loans in your credit file, such as credit cards, student loans, and car loans. Having a mix of credit is good, because it demonstrates you can juggle paying off several different debts at a time. A mix of credit contributes to 10% of your credit score.
“Ignoring credit mix can drag down your credit score,” Rosen says. On the flip side, “understanding and improving it can give you a boost.”
However, don’t open extra credit cards or take out new loans for the sake of having a good mix of credit if you can’t handle paying them, Watanasuparp warns. Otherwise, it will do more harm than good.
5. Too much new credit
New credit makes up 10% of your score. What lenders don’t want to see is that you have opened numerous low-limit credit card accounts, or put in multiple applications for new credit within a short period of time. They interpret this as a signal that you have difficulty handling credit. Furthermore, opening new lines of credit decreases the average length of your credit history, which can also hurt your score.
You could have too much credit if you struggle to make your monthly payments, and have a high amount of debt—especially new debt. So avoid opening new lines of credit unless necessary and when you know you can pay your bill each month.
How long does it take to repair your credit score?
If you’ve made a credit mistake like one of those listed above, it’s not the end of the world. Just start now to build up your credit again. However, it will take time, so be patient.
“Repairing your credit involves smaller tasks that can take anywhere from several weeks to several years to complete,” Rosen says.
Some of the items that stay on your credit report for years include the following:
- Bankruptcy: seven to 10 years
- Foreclosure/mortgage default: seven years
- Tax liens (unpaid property tax): up to 10 years for unpaid liens
- Charged-off accounts: seven years
- Lawsuits and judgments: seven years (even if a judgment has been satisfied)
Past credit score blemishes won’t necessarily prevent you from getting a mortgage, however. Talk with your lender and be prepared to explain what happened in the past and what steps you have made to correct the issue.
Deena Weinberg and Craig Donofrio contributed to this article.
