Skip to main content
Advertiser Disclosure
We do receive compensation from some partners whose offers appear on this page. We have not reviewed all available products or offers. Compensation may impact the order in which offers appear on page, but our editorial opinions and ratings are not influenced by compensation.

The Ascent Logo The Ascent Logo - Blue circle with an A in it and the ascent a motley fool company to the right of that

  • Credit Cards
  • Banking
  • Brokerages
  • Loans
  • Mortgages
  • Knowledge
  • Latest Picks
  • Search Icon Click here to search

Credit Cards

Top Picks
  • Best of January 2021
  • Cash Back
  • Balance Transfer
  • Travel
  • 0% APR
  • Rewards
  • Bad Credit
Knowledge
  • Beginners Guide to Credit Cards
  • How to Rebuild Your Credit
  • Maximize Your Credit Card Rewards
  • Learn More About Credit Cards
Credit Card Tools
  • Compare Cards
Looking for a new credit card?

Explore the best credit cards in every category as of January 2021.

Get started!

Banking

Top Picks
  • Best Savings Accounts
  • Best Bank Accounts
  • Best Money Market Accounts
  • Best CDs
  • Best Checking Account Bonuses
Knowledge
  • Beginners Guide to Banking
  • Everything You Need to Know About Savings
  • Money Market Accounts Made Easy
  • Learn More About Banking
Looking for a place to park your cash?

Check out our top picks of the best online savings accounts for January 2021.

Get Started!

Brokerages

Top Picks
  • Best Brokers of January 2021
  • Best Online Brokers for Beginners
  • Best Options Brokers
  • Best IRA Accounts
  • Best Roth IRA Accounts
  • Best Robo Advisors
Knowledge
  • How to Open a Brokerage Account
  • Beginner's Guide to Brokerages
  • Learn More About Brokerage
Just getting started?

Explore our picks of the best brokerage accounts for beginners for January 2021.

Get Started!

Loans

Top Picks
  • Best Loans of January 2021
  • Best Personal Loans for Bad Credit
  • Best Loans for Debt Consolidation
  • Best Low-Interest Personal Loans
  • Best Personal Loans for Good Credit
  • Best Personal Loans for Fair Credit
Knowledge
  • Personal Loans Made Easy
  • Debt Consolidation Guide
  • How to Pay Off Debt
  • Learn More About Loans
Thinking about taking out a loan?

Before you apply for a personal loan, here's what you need to know.

Get Started!

Mortgages

Top Picks
  • Best Mortgage Lenders of January 2021
  • Best Mortgage Lenders for Poor Credit
  • Best Refinance Lenders
  • Best VA Mortgage Lenders
Knowledge
  • First Time Homebuyers Guide
  • Home Loans Made Easy
  • The Complete Guide to Refinancing
  • How to Get a Mortgage with Bad Credit
  • Learn More About Mortgages
Tools & Calculators
  • Mortgage Calculator
Compare Rates
  • Today's Mortgage Rates
  • Refinance Rates
  • 15-Year Mortgage Rates
  • 20-Year Mortgage Rates
  • 30-Year Mortgage Rates
  • Jumbo Mortgage Rates
  • VA Loan Rates
  • 5/1 ARM Rates
  • 7/1 ARM Rates
  • FHA Mortgage Rates

Knowledge

Knowledge Section
  • All Articles
  • Credit Card Articles
  • Banking Articles
  • Brokerage Articles
  • Personal Loan Articles
  • Mortgage Articles
  • Personal Finance Articles
Recent Articles
  • U.S. Citizens With Undocumented Spouses Can Get Stimulus Checks

    Personal Finance

    U.S. Citizens With Undocumented Spouses Can Get Stimulus Checks
  • Don't Accidentally Throw Away Your Stimulus Check

    Personal Finance

    Don't Accidentally Throw Away Your Stimulus Check
  • Stimulus Check Update: $1,400 Checks Now on the Table

    Personal Finance

    Stimulus Check Update: $1,400 Checks Now on the Table
  • Weekly Mortgage News Roundup for Jan. 15, 2021

    Mortgages

    Weekly Mortgage News Roundup for Jan. 15, 2021
  • The Ascent
  • Knowledge
  • Mortgages

How to Improve Your Credit Score When Buying a Home

by Matt Frankel, CFP | Dec. 2, 2018

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

If you're thinking about buying a home, here are five tips to boost your credit score and get the best interest rate possible.

You may have heard that you don't need excellent credit to buy a home, and that's 100% true. You can get a conventional mortgage with a FICO® Score as low as 620, which is generally considered to be "fair" credit, and you could get an FHA mortgage from a lender with a score lower than that.

Having said that, a higher credit score can mean tens of thousands of dollars in savings over the life of your mortgage. Here's a look at the current average mortgage rates by credit score, and how much interest you could end up paying on a $200,000 30-year fixed-rate conventional mortgage loan.

FICO® Score Range Average APR as of 9/6/2018 Monthly Payment on $200,000 Mortgage Total Interest
760-850 4.225% $981 $153,144
700-759 4.447% $1,007 $162,550
680-699 4.624% $1,028 $170,137
660-679 4.838% $1,054 $179,415
640-659 5.268% $1,107 $198,390
620-639 5.814% $1,175 $223,104

Data source: www.myFICO.com

The FICO credit scoring formula

To be clear, the FICO credit scoring formula is a closely-guarded secret. In other words, there's no way to accurately determine the impact of any specific credit behavior, such as paying off a credit card.

However, we do know the basic structure. Your FICO® Score is made up of information from five weighted categories of information:

Why Better Mortgage scored a coveted 5-star rating from our experts

Why Better Mortgage scored a coveted 5-star rating from our experts

This is one of the top lenders we've used personally to secure big savings. No commissions, no origination fee, low rates. Get a loan estimate instantly!

Learn More

  • 35% - Payment history
  • 30% - Amounts owed
  • 15% - Length of credit history
  • 10% - New credit
  • 10% - Credit mix

With these categories in mind, here are a few suggestions if you are thinking of applying for a mortgage in the near future.

1. Pay down some debt, especially credit cards

As you can see, the amounts you owe on your various credit accounts is the second most important category in your FICO® Score.

Rather than focusing on the actual dollar amounts you owe, this category takes into account the relative amounts of your debts. In other words, how much of your revolving accounts are you using relative to your credit limits? How much do you still owe on installment loans relative to your original balances?

Credit card debt, especially if yours is more than 30% or so of your available credit, can have a particularly negative effect on your score. So, if you are planning to apply for a mortgage soon, paying down your credit card debt as aggressively as possible is one of the quickest ways to boost your credit score.

2. Don't apply for any new credit until your mortgage closes

This isn't as much of a score boost as it is a way to prevent your FICO® Score from going down. As you can see in the FICO formula, new credit accounts for 10% of your score. This includes your recently-opened credit accounts as well as the times you've applied for new credit (also known as "inquiries") for the past 12 months.

While the FICO® Score drop from opening a single new credit account is likely to be just a few points, every little bit helps when trying to get the best interest rate possible on your next mortgage.

3. Don't close old credit cards

This is a common credit mistake people make when trying to improve their credit scores. It may seem like closing some of your unused credit lines might be a positive catalyst. After all, if you reduce the amount of credit available to you, doesn't that make you less likely to get yourself in over your head in debt?

However, closing credit cards can actually have the opposite effect. There are two main reasons.

The first is that by reducing your overall credit limit, your remaining credit card balances will represent a greater percentage of your available credit. For example, if you owe $2,000 and you have four credit cards with combined limits of $10,000, you're using 20% of your available credit. If you close one of the cards with a $2,000 limit, your credit usage jumps to 25% of your available credit, even though your debt remained the same.

In addition, if you close accounts you've had for a long time, it could hurt you in the "length of credit history" category as well, which makes up 15% of your FICO® Score. Among other things, this category considers the ages of each of your accounts and the average age of all of your accounts. So, closing older accounts can reduce your average and hurt your score.

4. Pay all of your bills on time, every month

This is the most obvious thing you can do to maintain and gradually improve your credit, but since your payment history is the single most important component of your FICO® Score, it's still worth mentioning. There are few easier ways to ruin your homebuying ambitions than accidentally missing a payment on one of your credit accounts. Even a single late payment can cause your score to plunge by 100 points or more if you have excellent credit.

5. Ask for credit limit increases

We've already discussed that the "amounts owed" category is one of the most important factors in your FICO® Score, and that paying down your debts can help you maximize this portion of your score.

Similarly, there's another less-obvious way of reducing your credit utilization -- simply call your credit card issuers and ask for a credit line increase. In many cases, you can do this online with a few clicks of the mouse.

Here's why this can work. Let's say that you owe $1,000 on a credit card with a $2,000 limit, so you're using 50% of your available credit. If your credit line is increased to $4,000, your utilization percentage immediately drops to 25% without paying off a dime of your debt.

To be clear, it's still a smart move to pay off credit card debt as aggressively as possible, both for increasing your FICO® Score and for your overall financial health. However, asking for a credit limit increase can give you an extra boost.

A historic opportunity to potentially save thousands on your mortgage

Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase. 

Our expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See our full advertiser disclosure here.

About the Author

Matt Frankel, CFP
Matt Frankel, CFP icon-button-linkedin-2x icon-button-twitter-2x

Matt is a Certified Financial Planner® and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice, and in 2017 he received the SABEW Best in Business Award.

Share This Page
Blue Facebook Icon Share this website with Facebook
Blue Twitter Icon Share this website with Twitter
Blue LinkedIn Icon Share this website with LinkedIn
Blue Mail Icon Share this website by email

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

Related Articles

"Rates" on a stick note on a house image for Find the Best Mortgage Rates

Find the Best Mortgage Rates

Cardboard cutout house on a desk image for Best Mortgage Lenders for 2021

Best Mortgage Lenders for 2021

Money bags and a model house sit on a balance beam image for Best Mortgage Refinance Lenders for 2021

Best Mortgage Refinance Lenders for 2021

Change on a desk image for Mortgage Payment Calculator

Mortgage Payment Calculator

Featured Articles

Find the Best Mortgage Rates

Best Mortgage Lenders for 2021

Best Mortgage Refinance Lenders for 2021

Mortgage Payment Calculator


We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

The Ascent Logo

The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.

btn_facebook-yellow btn_twitter-yellow btn_instagram-yellow

Copyright © 2018 - 2021 The Ascent. All rights reserved.

About The Ascent
About Us Contact Us Newsroom How We Make Money Editorial Integrity Ratings Methodology
Legal
Terms of Use Privacy Policy Accessibility Policy Terms and Conditions Copyright, Trademark and Patent Information
Learn
Credit Cards Banking Brokerage Loans Recent Articles

By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.

Back to The Motley Fool