Improve Your Credit Score
TLDR: The best credit scores get the best interest rates. Lenders prefer a long credit history, no outstanding credit balance, and a high credit limit.
The ideal borrower has the following credit history: Many accounts that have been open for long periods of time with minimal balances and no late payments but with large credit limits. If that doesn’t sound like your credit profile, there are several things you can do to improve your credit score, but keep in mind that you likely won't see an immediate improvement in your credit score, so it’s important to plan ahead in preparation for buying a house in order to get the lowest interest rate.
Why should you improve your credit score prior to purchasing a house?
Because they’re all related: Your credit score has a direct impact on what banks will offer as an interest rate, which affects how much your monthly payment will be, which subsequently affects your maximum purchase price. Through the transitive property (maybe high school math class will come in handy after all!), your credit score impacts affordability. Get that score cleaned up and you'll be thankful you did for the next 15 to 30 years!
The Dos and Don'ts of Improving Credit
"Do or do not. There is no try."
-Yoda, The Empire Strikes Back
Pre-Purchase Do's
While credit scores are seemingly a science all their own, here are some things you can do to increase your credit score and subsequently lower the interest rate you'll be offered:
Pay down your debt
Increase your existing credit limit, which reduces the usage percentage, as long as the credit card company doesn't pull a hard credit inquiry
Pay off any collections bills
If far enough in advance, open a credit card to extend your credit history
Pre-Purchase Do Not's
To avoid inadvertently lowering your credit score, you need to be mindful of your timeline. Below are a few things to avoid:
Don't keep balances on credit cards, or reduce debts as much as possible (Any balance negatively impacts your score)
Don't allow any extraneous hard credit inquiries until you're ready to apply for a loan
Don't allow bills to go to collections
Don't open a credit card if planning to buy in the near future
Credit: A Flawed System
Credit scores can be an inaccurate representation creditworthiness. While they tell the story of your repayment history, they don’t factor in your ability to pay outright without having to borrow money. If you consistently save up and make your purchases in cash, you won’t have to borrow money, resulting in an absent credit history and a lackluster—or negligible—credit score despite your respectable financial decisions. Alas, that is the way of borrowing in the good ol’ US of A for now.