How to Improve Your Credit Before Refinancing

If you are looking for a way to lower your monthly mortgage payments or free up some cash, refinancing is a great way to do it. But how do you guarantee that you will get a good deal with favorable interest rates? One way to ensure you get the best refinancing deal is to improve your credit score.

With a better credit score, you are much more likely to get a refinancing deal with a lower interest rate, which can help you save thousands on the cost of your mortgage. 

But how do you improve credit for refinancing your mortgages? Here are several steps you can start taking today to improve your credit and get approved for your new loan.

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In this article

    How your credit score affects your mortgage

    First of all, how does your credit score affect your mortgage? When applying for a mortgage, your credit score is one of the key pieces of information that mortgage lenders will look at when deciding whether or not to approve you for a loan. This information also helps lenders to determine what interest rate you qualify for.

    If you have a poor credit score, you are generally deemed a higher risk and will therefore get a higher interest rate on your loan, if you’re approved at all. On the other hand, if your credit score is high, you will likely qualify for a low interest rate, which will help you save money.

    When it comes to refinancing, the main reason people go through the process is to save money. If you currently have a high interest rate but have improved your credit score since the time your loan was issued, a refinance could be your ticket to lower monthly costs. 

    Refinancing with your updated credit score will tell lenders you are less of a risk, which should result in lower interest rates. This, plus the fact that you’ve since built equity in your home, could help you save a considerable amount of money. That’s part of why it’s in your best interest to work on improving your credit before refinancing to ensure you get the best refinance rates possible.

    Read: How Much Can You Save By Refinancing?

    How to improve your credit score before refinancing 

    If you know you want to refinance, the best place to start is by looking at your current credit score before you begin your research. 

    Knowing your credit score before refinancing gives you a chance to address issues or room for improvement. If your credit score is not perfect, there are steps you can take to rectify it. These include:

    • Pay off outstanding debts — This is the first order of business when it comes to improving your credit for refinancing. If you can prioritize paying off existing debts and keeping your credit usage down, this will help to improve your score. 
    • Check your credit report for mistakes — Check your credit score with each of the three credit bureaus, Equifax, Experian and TransUnion, to see if there are any mistakes or causes for concern. If there are, you need to start the process of correcting them ASAP.
    • Ask your credit card companies to raise credit limits — By raising your credit limit, your credit utilization percentage will be lower, which can be another way to improve your score. 
    • Avoid opening new credit accounts — While you are trying to build up your credit score, it’s wise to avoid opening new credit cards or accounts, as this could temporarily affect your score. 
    • Avoid closing old accounts — When you close old credit card accounts, you are reducing your overall credit limit. If your credit utilization percentage increases, it can reflect poorly on you. 
    • Avoid paying just the minimum — If you can make more than the minimum payments on your credit cards each month, this will help in two ways. It will look better on your credit report and it will also help you clear the balance faster. 

    Credit score tips

    Whether you are planning to refinance soon or one day in the near future, it’s always a good idea to keep your credit score in mind. In fact, there are some things you can do now which will help you keep your credit well-maintained for the day you eventually take out new loans.

    • Regularly check your score — Don’t just leave it until right before taking out a new loan. Try to get into the habit of keeping an eye on your credit score. That way, you’re always aware and on top of any changes. Then you can rectify any issues before they become bigger problems. Another benefit of this is that it keeps you aware in the event of any identity theft, which can lead to negative blips on your credit report.
    • Keep your utilization down — Don’t charge up your credit cards or it will affect your score. Keep your balances low, work to pay off your balances when possible, and don’t make any big purchases prior to refinancing.
    • Use credit score-boosting products – Your credit score may not present a full picture of your finances, but there are some products you can use to boost your score. Experian Boost and UltraFICO are two products that allow you to provide additional information to credit bureaus and lenders. This includes more details on your financial habits and history. For example, you can include information about your on-time payment history or proof of consistent cash in your accounts.

    Read: How to Improve Your Credit By Avoiding Mistakes

    Things to keep in mind

    While trying to improve your credit for refinancing, there are some key things to bear in mind. The first thing to know is that many of the methods of improving your credit score are not instant fixes. It will take some time for your credit score to update. That means it’s best to put these plans in place well ahead of any new lending applications.

    Another thing to consider is that improving your credit score is not something you should only do once. It’s good practice to check and build your score on a regular basis. That way, you’re always in a good position to apply for loans or refinancing. 

    When refinancing your mortgage, it’s also important to remember that your credit score isn’t the only important factor. You also need to pay attention to your loan-to-value ratio, your property type, the size of the loan and the amount of equity in your home. These will all play a part in the lender’s approval decision.

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