5 Things You Can Do To Improve Your Credit Score
When you’re getting your finances in order so that you can buy a home one of the first things that you should do is check your credit score. The credit score you have will determine whether or not you can get a mortgage, and what the interest rate for your mortgage will be.
Credit scores range from 300 to 850. Typically a score of 670 or higher is considered to be a “good” credit score. Each lender will set their own minimum required credit score, but most conventional home loans require a credit score of at least 620.
If you’re going to be using an FHA mortgage you can qualify for a home loan with just a 500 credit score. However, if you have a credit score lower than 580 and you’re applying for an FHA loan you will have put down a down payment of least 10%. If your credit score is above 580 you will only need to put down a 3.5% deposit with an FHA home loan.
So even though your credit score isn’t the only thing that can impact your mortgage eligibility it’s something that lenders do look at closely. If your credit isn’t great you should do what you need to do to fix it before you apply for a home loan.
The money that you can save by having a higher credit score makes the effort it takes to fix your credit score worth the hassle. Improving your credit score isn’t that tough but it does take time, which is why you should start right now. The best ways to improve your credit score so you can buy a home are:
Look For Any Mistakes
The first thing that you should do when you’re starting to fix your credit is pull your credit report. You can get one free copy of your credit report per year through this site. Or, your bank or credit card company may offer free access to your credit report as a perk.
Get a copy of your credit report from all three credit bureaus. Check each report carefully and look at each item. If there are items on your credit report that aren’t accurate you need to get those removed from your card. You can dispute items on your credit card that you don’t owe, have already paid, or don’t belong to you. Many people find that just getting rid of any inaccurate items on their credit report can boost their score.
It can take some time for items that aren’t correct to be deleted from your credit report. If there are negative items on your credit report you can contact the original creditor to try and work out a payment arrangement or what’s called a “pay-for-delete” where you agree to pay a reduced amount and the creditor agrees to delete the negative item. Not every creditor will be open to that kind of arrangement but it never hurts to ask and see if they are.
Pay Down Debt
If you commit to paying off debt you will be able to raise your credit score and also improve your debt-to-income ratio which will also help you get a home loan. So paying off debt should be a priority if you want to buy a home. However, the type of debt that you have and the type of debt that you choose to pay off matter when it comes to your credit report.
Home mortgage lenders like to see a combination of installment loans and revolving debt on your credit report. Installment loans are things like a car loan or a personal loan. Revolving debt is credit cards. Together the available credit from both installment loans and revolving debt will factor into your credit score. However, paying off installment loans won’t boost your credit score. In fact, when you pay off an installment loan that can temporarily cause your credit score to go down. That’s because when you pay off the account you’re effectively closing the account.
With revolving debt you are paying the debt down but then using it again. Actively using your credit will help your credit score, as long as you use it strategically.
Strategically Use Your Credit
While it’s good not to have too much debt you shouldn’t stop using your credit totally if you are trying to fix your credit score. It might not seem to make much sense but strategically using your credit will fix your credit score faster than not using it at all.
The first thing that you should do is pay down your credit cards to less than 30% of the total available credit. If you can pay the cards down to 7% that’s even better, but shoot for 30%. Keeping your credit card balances under 30% of the available credit will give you the most bang for your buck when it comes to fixing your credit score.
If you can pay off the full balance on at least one credit card you should use 7% of the available credit on that card each month and then pay it off completely when the bill is due. That will dramatically improve your credit score relatively quickly.
Pay Your Bills On Time
Paying your bills on time isn’t difficult, but it’s the most important thing you can do to raise your credit score and maintain your score after you get it where you want it to be. Even one late payment can cause a drop in your credit score that could end up costing you a lot of money when you’re looking for a home loan.
A great way to make sure that your bills are always paid on time is to use autopay. Every bank offers it. You can set up automatic payments for your utility bill, your car payment, your insurance, and any other recurring monthly expenses that you have. That way you won’t have to worry that forgetting a payment or being late on a payment will ruin your chances of getting a home at an affordable rate.
Monitor Your Credit
Once you have raised your credit score you will need to carefully monitor it. Don’t open any new lines of credit and make sure that there are no new inquiries or items reported to the credit bureau. Keeping an eye on your credit will help you get a pre-approval for your new home loan when you’re ready to start applying for a mortgage.