Buying a home is a major life milestone, but it requires careful planning, especially when it comes to your credit score. Many homebuyers unknowingly make mistakes that can hurt their chances of qualifying for a mortgage or securing favorable interest rates. Since your credit score plays a key role in the home-buying process, avoiding common pitfalls is crucial.
In this blog, we’ll cover five credit mistakes that can jeopardize your ability to buy a home—and offer strategies to help you avoid them. Taking the right steps now will ensure that your financial profile is in the best shape when you're ready to apply for a mortgage.
1. Maxing Out Your Credit Cards
One of the most common mistakes people make is maxing out their credit cards. Your credit utilization ratio—the amount of credit you're using compared to your credit limit—is a significant factor in determining your credit score. Lenders view a high credit utilization ratio as a sign that you're over-reliant on credit, which can negatively impact your score.
For example, if you have a credit limit of $10,000 and consistently carry a balance of $9,000, you're using 90% of your available credit. Lenders prefer to see utilization rates below 30%, so maxing out your cards could lead to a drop in your score and make mortgage approval difficult.
How to Avoid This Mistake: To keep your credit utilization low, aim to pay down your balances each month. If you can't pay off the full amount, focus on keeping your credit usage below 30% of your total limit. If you have a high balance, consider requesting a credit limit increase to improve your utilization ratio, but be sure to keep your spending in check.
2. Missing Payments
Your payment history accounts for 35% of your credit score, making it the single most important factor. Missing even one payment can cause a significant drop in your score, and the negative impact can last for up to seven years. A late or missed payment could mean the difference between getting a mortgage with favorable terms and being denied altogether.
Missing payments also signals financial instability to lenders, which can hurt your chances of getting a good interest rate on your mortgage. A lower credit score will almost certainly result in higher interest rates, costing you more over the life of your loan.
How to Avoid This Mistake: To avoid missed payments, set up automatic payments or reminders for all of your bills, including credit cards, loans, and utilities. Even if you can only pay the minimum amount, making payments on time is critical for maintaining a strong credit score.
3. Closing Old Credit Accounts
While it may seem like a good idea to close unused credit accounts, doing so can actually hurt your credit score. Closing an account shortens your credit history, which makes up 15% of your overall score. Lenders favor borrowers with longer credit histories because it shows they have experience managing credit over time.
Additionally, closing an account reduces your available credit, which can increase your credit utilization ratio if you carry balances on other accounts.
How to Avoid This Mistake: Instead of closing old accounts, consider keeping them open, even if you don’t use them regularly. You can maintain the account by making small purchases and paying them off each month. This will help lengthen your credit history and keep your credit utilization low, both of which are beneficial when applying for a mortgage.
4. Applying for Too Much Credit at Once
Each time you apply for credit, a hard inquiry is placed on your credit report, which can temporarily lower your score by a few points. If you apply for multiple credit accounts in a short period, the cumulative impact of those hard inquiries can add up, making you appear riskier to lenders.
Too many hard inquiries suggest that you're seeking credit aggressively, which can be a red flag for mortgage lenders. This could result in a denied mortgage application or a higher interest rate.
How to Avoid This Mistake: If you’re planning to buy a home, it’s best to avoid applying for new credit in the months leading up to your mortgage application. Focus on maintaining your current accounts and building a strong credit history instead.
5. Ignoring Your Credit Report
Many people don’t regularly check their credit reports, which can be a costly mistake. Errors, identity theft, or outdated information on your credit report can all lower your score without you knowing. If you don’t review your report before applying for a mortgage, you might not catch these issues in time to dispute them.
Lenders rely heavily on your credit report to evaluate your reliability, so it’s important to ensure that all the information is accurate.
How to Avoid This Mistake: Check your credit report at least once a year through free credit reporting services like AnnualCreditReport.com. Look for any errors or unfamiliar accounts, and dispute any inaccuracies with the credit bureaus as soon as possible. This will help you avoid any surprises when you apply for a mortgage.
Final Thoughts: How Ava Finance Can Help You Build Credit and Prepare for Home Buying
Avoiding these five common credit mistakes can significantly improve your chances of getting approved for a mortgage with favorable terms. Maintaining low credit card balances, paying bills on time, keeping old accounts open, avoiding unnecessary credit applications, and regularly monitoring your credit report are all crucial steps in preparing your credit for home buying.
This is where Ava Finance comes in. Ava Finance is a credit-building tool that helps you monitor your credit score, manage your credit usage, and ensure you're taking the right steps to maintain a strong credit profile. With real-time credit updates, and reminders, Ava Finance helps you stay on top of your credit health and avoid mistakes that could damage your home-buying chances.
Whether you're in your early stages of credit-building or preparing to apply for a mortgage, Ava Finance provides the support you need to build a strong financial foundation. By using Ava Finance, you'll not only improve your credit score but also enhance your ability to secure a mortgage with better interest rates, saving you thousands over the life of your loan.
Start using Ava Finance today to build your credit and take control of your financial future—one step closer to homeownership.
