You are probably aware of the fact that mortgage lenders factor in a person's credit score when determining whether to approve a mortgage loan or not. A person's credit score can impact his or her ability to get a loan, and it can also affect the terms of the loan if the lender approves the loan. If you would like to have an easier time qualifying for a loan and a better chance of getting good terms on the loan, you could spend time building your credit before applying for a loan, and here are a few things to know about this.

Credit Score Rankings

Before you can understand whether or not you need to work on your credit before applying for a mortgage, you should have a basic understanding of the way credit scores rank.

For your credit to be considered either very good or excellent, you need a score that is at least 740. A score of 670 to 739 is a mediocre score that is labeled "good." A score below this is considered less than good and even poor in some cases. If your score is not where you would like it to be, you can try to improve it.

The Basics of How Credit Scores Work

Before improving your score, it is important to understand the basics of how credit scores are calculated. A major part of a credit score is your payment history, which makes up 35% of your score.

Another major part of your score is your outstanding balances, which makes up 30% of your score. Together, these two factors make up 65% of your score. There are a few other categories that also affect scores, which are the age of credit history, new lines of credit, and credit mix.

Your credit utilization rate also greatly affects your credit score. This rate compares the amount of credit you are using to the amount you have available. For example, if you owe $100 on a credit card that has a $1,000 balance, your credit utilization rate would be 10%. You should aim to keep this rate below 30%, but a rate lower than this is even better. 

The Best Things to Do

Now that you understand how scores rank and how they are calculated, it is time to start working on your credit, and here are some tips to follow.

First, you should not close any old accounts you have. By closing these accounts, you could shorten your credit history. The length of your credit history is an important variable for your credit score.

A second thing to do is to pay off balances you owe. By doing this, you will reduce your credit utilization rate. Once you do this, you might see an increase in your score. Additionally, avoid using your credit cards for a while unless you can pay off the balances when the statements come.

Next, you should dispute any errors you find on your credit report, but you should only do this if the errors are negative. You can easily dispute anything on your report by going to the websites of the credit bureaus that are reporting the mistakes.

Finally, you should consider taking out an installment loan. Making consistent, on-time payments on a loan will increase your credit score over time as it builds payment history. Payment history is a vital part of your credit score and makes up a big part of your current credit score. 

If you have questions about mortgage loans, credit scores, and guidelines lenders use for mortgages, call a bank or loan company like Choice Mortgage today.