Improving credit score will help with preapproval

Q: I have been enjoying your videos on YouTube and had a question about a preapproval. My wife and I intend to try and get preapproved for a mortgage to buy our first home. We are shooting for next spring to get preapproved and then plan to begin our search after that.

We have no car debt, no credit card debt, and we just paid off my wife’s student loans. We have also paid off all of my student loans with the exception of one. I am now at a 740 Fico score.

Is it better to finish paying this loan off and run the risk of my credit score dropping once the account is closed and fall below 740, or just leave it alone and apply for the preapproval as it is?

A: Thanks for taking the time to write to us, and we’re glad you have found Ilyce’s YouTube channel: YouTube.com/Expert RealEstateTips.

Let’s start with a “congrats.” You and your spouse have done a remarkable job in paying off your debts. But you’ve made what we think of as an incorrect assumption when it comes to paying off that last bit of debt: While you may experience a temporary drop once the debt is paid off, it shouldn’t last long, if it happens at all. Paying down your last remaining debt should help raise your credit score over time.

We don’t see your current student loan debt as a problem that will prevent you from getting approved for a mortgage next spring. Making all of your monthly payments on time will continue to burnish your credit report and score. Paying your bills on time (and in full) by the due date is the best way to improve your credit history.

Credit scores consist of five basic components: (1) your payment history; (2) how many different types of credit accounts you own; (3) what percent of your maximum available credit you’re using at any one point in time; (4) public records, like judgements against you; (5) the length of your credit history, or how long you’ve had individual pieces of credit (pro tip: the longer the better).

There are little things you can do beyond paying your bills on time that will help improve your credit history. For example, you should limit how much of a credit card balance you carry to less than 30 percent of your total available credit.

Longevity is also prized by creditors. So, the longer your credit history, the higher your score. That’s why consumers who cancel old cards and then sign up for new accounts have lower scores over time.

Each month you pay your bills on time, don’t use too much of your available credit and manage your credit cards well, your credit history improves and your credit score should reflect that.

Good luck and happy house hunting.