Tips to Raise Your Credit Score
There are few things in life that can be as exciting as buying a new home- especially if it’s your first time! However, the process can also be daunting particularly when it comes to securing financing. Even for those with an excellent credit score, solid finances, a healthy savings stockpile, and an existing home that they’ll be selling at the same time, with today’s federal requirements on mortgages, the mortgage process can be complicated.
Your credit score is one of the biggest factors in how much of a home loan you can qualify for and the interest rate you’ll pay. The good news is there are easy ways to increase your credit score. By following a few tips, you can make sure your report accurately reflects your use of credit and create a plan to improve your scores if necessary.
Get your report- The first step is to get a credit report, which will include your numerical score, along with a detailed summary of your credit history. Everything from your past and present credit accounts to bankruptcies and foreclosures will be listed here. You can request a free copy of your credit report from each of three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once each year at AnnualCreditReport.com. Scores range from 300 to 850, with a higher score being better.
Check for Errors – The credit bureaus do not check reports for accuracy, so it’s up to you to go through and make sure that everything listed is accurate and up to date. The process for addressing any errors you find can be found here, courtesy of the Consumer Financial Protection Bureau.
Pay Down Credit Card Debt – Few things will boost your score like lowering your debt to income ratio. Less debt is better, but try to aim to have no more than 50% of your credit in use at any time. Being overleveraged hinders for your credit score, and can be a serious problem should you need to make a large purchase after buying a home (repairs or renovations, new furniture or appliances, or even moving costs).
Remove Negative Accounts – If you’ve had dealings with a collections agency or have bad debt, attempt to negotiate with the creditor to have the debt removed from your record. Some agencies may settle for a partial repayment in return to help clear your record and improve your score.
Keep Old Accounts Open – About 15% of your score has to do with how long you’ve had credit accounts. That’s why opening a new credit card account today will have little impact on your credit score in the near future. Older accounts will make a bigger impact, compounding the importance of turning any old debts onto your account into positive, paid off accounts.
Pay On Time – When it comes to credit score, make sure you’re paying your bills on time! Delinquency will negatively impact your score, and can be hard to recover. 35% of your credit score is comprised of your payment history.
Diversify your credit – Having different types of credit will help boost your score over time (up to 10%). This is called a credit mix, and is attained by having both installment and revolving credit accounts. You can learn more about how to create and maintain a credit mix from Experian. As a note, payday loans and title loans will not positively impact your credit report. Defaulting on these types of loans can negatively impact your score, though, should you make late payments or default on the loan.
Consider a Bankruptcy- If you’re really in over your head, it might be time to take a step back and consider bankruptcy. This will clear out many of your old, negative debts, preparing you for a purchase later down the road, once you have your finances back together.
Credit issues do not last forever. By understanding what affects your credit, you can make real changes which will increase your score. Think smart and understand your options- improving your credit score might be easier than you thought and owning a home might be in your future!