Upping Your Credit Score (Before Applying for a Mortgage)

Improving your credit score is a crucial step in preparing for a mortgage! Lenders use your credit score to assess your risk as a borrower - so a poor credit score could put your homeownership dreams in jeopardy, whereas a high credit score can help you qualify for lower interest rates, better mortgage terms and serious savings over the life of your mortgage.

Here are some actionable steps you can take to improve your credit score before applying for a mortgage…

1. Pay Down Debts

One of the most effective ways to boost your credit score is to reduce your outstanding debt. First, prioritise paying off the credit cards and loans that have the highest interest. As well as increasing your credit score, this approach will save you the most money.

(Another option some people like to use is the ‘debt snowball’ method. This is where you pay off your smallest debts first, to build momentum and motivation.)

2. Correct Errors

It’s not uncommon for there to be errors on your credit report - and these can significantly impact your credit score.

There are three credit reporting agencies in New Zealand: Centrix, Equifax and Illion. You can get a free credit report from any of these three agencies.

If you find any errors, dispute them with the credit bureau. Provide documentation to support your claim and follow up to ensure the inaccuracies are corrected.

3. Avoid New Credit

Opening new credit accounts or making large purchases on credit can negatively impact your credit score, especially before applying for a mortgage.

So avoid opening new credit cards or taking out new loans in the months leading up to your mortgage application, and try to avoid making any large purchases on your existing credit cards, because high outstanding balances can lower your credit score.

This could also mean closing down your buy-now-pay-later accounts (like Afterpay) for the time being.

4. Pay Your Bills on Time

Consistently paying your bills on time is one of the most critical factors in maintaining and improving your credit score.

Use calendar reminders or set up automatic payments to ensure you never miss a due date. And if you do miss a payment, get current and stay current. The longer you pay your bills on time, the more your score should improve, and the more likely you are to be approved for a mortgage.

5. Keep Balances Low

Keeping your credit card balances low relative to your credit limit can positively impact your credit score.

A good rule of thumb is to aim to keep your credit utilisation ratio below 30%. For example: if your credit limit is $10,000, try to keep your balance under $3,000.

Of course, the best option is always to pay your balances off in full. If you can do that each month, you’ll avoid interest charges, reduce your credit utilisation ratio to 0% and improve your credit score.

6. Extra Tips n’ Tricks

The length of your credit history accounts for a portion of your credit score. Keeping older accounts open will help improve the average age of your credit accounts.

Another tip: try to diversify your credit mix - having a variety of different credit types (credit cards, instalment loans, etc.) can positively impact your score, as long as you manage them responsibly.

A higher credit score can lead to lower interest rates, better loan terms, and significant savings (in the tens or even hundreds of thousands of dollars!) over the life of your mortgage.

For friendly, unbiased and personalised advice on preparing for a mortgage, contact our team of mortgage brokers.
We’re here to help you achieve your homeownership goals.

Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.