Making sure your credit is in the best shape possible before applying for a mortgage is crucial. You should know everything on your credit report and be able to answer questions about old and new accounts. No lender wants to hear the words, "I don't know," if they ask what a charge-off was. Besides, if you get familiar with your credit report early enough you will have time to address anything that's bringing your score down. You may not think having one small mistake removed will make a difference, but it will.
1. Focus on Recent Negative Entries - If you have blemishes on your credit that you are going to address always work on the most recent ones first. Older credit problems don't hold as much weight as newer ones.
2. Don't Open New Credit Cards - Just because you can get approved for many credit cards does not mean you should apply or them. Some think that opening a number of cards will make them look more attractive to lenders because they have more available credit. Unfortunately, having a lot of "new" credit could actually work against you and reduce your credit score.
3. Hold On to Old Credit Accounts - Lenders love seeing established credit. If you have old credit cards you no longer use anymore because they have been replaced by newer ones with lower interest it can be tempting just to close them. This is the last thing you want to do. Old credit makes you look more established. If you have to charge one small thing on the card and pay it off monthly to ensure the card remains open then do so.
4. Always Pay on Time - Paying bills late has more consequences than just being stuck with late charges. Payment history accounts for about 35 percent of your credit score. Get in the habit of paying bills early, so you are less likely to be late.
5. Pay Down Balances - Don't use available credit just because you have it. You may be interested to learn that 30% of your score is comprised of credit utilization, so aim to keep your used credit below 30%.
6. Eliminate Nuisance Balances - If you have a dozen credit cards in your wallet from different retailers and they all have only a small balance, these are nuisances to your credit. Pay off all these cards or transfer balances to one Visa or MasterCard (preferably an old card).
When you buy a home, your credit is going to receive a lot of attention. Order a copy of your credit report from all three bureaus early so you have time to address any concerns you discover. The smallest improvement in your credit score could result in big savings with a lower interest rate.