A while back, I cautioned readers to avoid swiping the credit card before applying for a mortgage.
In short, the more you charge, the higher your outstanding balances. And the higher your balances, the lower your available credit.
This can result in lower credit scores since utilization is a big factor for FICO. And it can increase your debt-to-income ratio as well.
Simply put, if you’re seen as overextended due to maxed out credit cards, your credit scores will suffer.
So you can give your credit scores a boost by simply doing nothing, but there are some proactive measures you can take as well.
Increase the Credit Limits on Your Credit Cards
- One quick and easy way to boost your credit scores is to increase your available credit
- You can do this by raising the credit limits on the credit cards you have open
- Simply ask your credit card issuers for credit line increases online or by phone
- Once granted your utilization will go down and your credit scores should improve over time
One simple trick to improve your credit scores is via a credit limit increase.
This is something that is very easy (and fast) to accomplish thanks to the many credit card management tools now at our fingertips.
If you visit just about any credit card issuer’s website, you should be able to find an area to increase your credit limit online.
Typically, all you need to do is enter enter your gross annual income and monthly housing/rent payment.
With other issuers, such as American Express, you are asked to enter your desired credit limit and then hope they extend it to you. Apparently you can get 3x your starting limit with little trouble.
So if you started with $5,000, you could get it increased to $15,000 simply by visiting the American Express website and filling out an online form.
Once submitted, you’ll either get that new limit, something in between, or you’ll be denied.
But as long as your credit history and income is sufficient, you should get something. What’s awesome is it can take as little as a few seconds to get your new line of credit.
Note: Some card issuers may need to pull your credit report to do this, which could affect your credit scores temporarily due to the inquiry.
They’ll typically notify you first, but this is why you should request credit increases 3+ months in advance of your mortgage application to let the dust settle.
Lower Your Credit Utilization to Improve Your Scores
The underlying goal of a credit limit increase is to lower your credit utilization, which is the percentage of credit you’re actively using at any given time.
A lower utilization, similar to a lower debt-to-income ratio, is viewed favorably by credit bureaus and mortgage lenders, respectively.
So imagine you have that American Express credit card with a $5,000 limit.
If you currently have a $2,500 balance, even if it’ll be paid off on time and not revolved, you’re essentially using 50% of your available credit. This isn’t a good thing when it comes to credit scores.
You may actually want to keep your utilization rate below 25%. In this case, no more than $1,250 outstanding, even if you pay it off in full by the due date.
But what if you naturally charge a lot on your credit cards each month, despite paying them off in full every month? What can you do to keep utilization low?
Well, if your credit limit happened to be $10,000 instead of $5,000, that $2,500 balance would only represent 25% utilization.
If it were $15,000, it’s only around 17% utilization, which should certainly be viewed favorably.
In other words, all you have to do is ask for higher credit limits, instead of spending less. Of course, spending less will sweeten the deal and ideally push your credit scores even higher.
Tip: It’s easier to get credit limit increases approved if your balances are low because you’re viewed as a lower risk customer.
Pay Off Your Existing Balances at the Same Time
- Another trick that goes hand in hand with the first tip is to pay down your balances
- Any existing loans and credit card balances that you can chip away at
- This will also effectively free up available credit and should give your credit scores a boost
- It will also lower your DTI because minimum payments will be reduced in the process
In conjunction with the first tip, you can also pay down any balances you may have, assuming you don’t pay your credit cards in full each month.
If implemented together, you can get higher limits and reduced balances, which will be a one-two punch in the credit utilization department.
So using our same example, if the individual with the $2,500 balance lets carries it from month to month and only has a $5,000 credit limit, imagine if they got a higher limit and started paying it down.
They could push their utilization down from 50% to say 15% if they got the limit increased to $10,000 and paid $1,000 off the balance.
These actions should result in a higher credit score, which generally means a better mortgage rate if you apply for a home loan.
Additionally, smaller credit card balances mean you’ll have more of your income available to use toward a mortgage payment.
So you may actually be able to qualify for a larger mortgage and/or buy more house.
Give It Time to Work
The only caveat here is that a credit limit increase request could result in a hard inquiry on your credit report.
Because you’re requesting additional credit, some card issuers treat it as a quasi-application, meaning they’ll need to review your credit history.
This could ding your credit slightly, like any new line of credit. It’s temporary, but may offset some of the expected gains of a higher limit.
So either request the increased limits several months in advance of applying for a mortgage, or ask the credit card issuer if it will result in a hard or soft pull before making the request.
If it’s the latter, it won’t harm your credit score. Regardless, inquiries typically don’t impact scores much, maybe 3-5 points and the damage is generally short-lived.
One final thing you can do is check out the Experian Boost, which increases credit scores by adding positive payment history to your credit file.
It can be helpful to those who lack traditional credit history, but pay other bills on time like a cell phone or utility.
In closing, you’ll want to approach mortgage lenders with the highest credit scores possible. This ensures you have the best chance of approval and also obtain the lowest interest rate available.
Read more: What credit score do I need to get a mortgage?