Tips on How to Improve Your Credit Before Buying a Home
Do you intend to purchase a home in the near future? Well, your credit score may be the only obstacle standing between you and your dream. This number summarizes your credit report, a document containing details about how well you manage money. This includes paying off debts such as college debts and credit cards. The score is crucial when seeking a mortgage because lenders will use it to determine your creditworthiness.
A higher number translates into a creditworthy individual which is good for you. A low figure, on the other hand, means you’re likely to default and, therefore, be risky to the lender. If you fall into the last category, your only chance of getting favorable terms depends on how fast you can improve this figure.
1. Request Your Credit Report
For you to solve any problem, financial or otherwise, the first step is to know your current position. Next, is to understand the problem at hand so you can understand how to solve it in the most efficient way possible.
For a financial problem such as having bad credit, it’s important to first get a hold of your credit report. With a current report in your hands, it’s possible to know your financial position. This will then provide you with a foundation to build on in order to achieve a better credit rating to buy that house you want.
If you don’t have a report, request one from each of the leading credit bureaus. You’re entitled to a free report every year from these bureaus.
2. Search for Errors on Your Report
Sometimes a poor credit score may not be your fault. A recent report by the Federal Trade Commission revealed that up to 25% of Americans had errors on their reports that weren’t their fault. For example, someone with the same name as yours might have skipped a payment and instead, the reporting agency listed this entry in your report.
With this in mind, it’s clear why you need to scrutinize each entry on your report with the aim of confirming their correctness. If you encounter any error in the report, contact the relevant bureaus armed with the proof they’re wrong. After you do that, they’ll work to clear the errors from the report and later on the changes will reflect on your overall score. For this type of error, it may take up to two months to fix.
3. Pay Your Bills on Time
By now, you already know paying your bills on time is a great way of improving your credit score. Therefore, if you have any pending bills, it’s in your best interest to clear them on time. By doing this, you’ll improve your score in a month or two. As a result, you can get a mortgage with lenient terms such as a low-interest rate and a smaller deposit. In addition, if your due date passed, but is still within 30 days, there’s good news: You can still pay the bill and not have to worry about a negative report. This is because creditors wait until 30 days are over to report any activity.
4. Pay Off All Balances
If you’re looking for the fastest way to improve your credit and one with the biggest impact, clearing all balances is your best bet. You see, credit utilization is the card balance compared to the set limit on the card, and this contributes a whopping 30% to your overall score.
You can time your payments to make sure you get maximum benefits from this method. The smartest way is to use the card and pay off the balance at the same time. This is a smart move since the lender will see you’re paying off any balance while at the same time using the card. If you’re unsure of when the creditors report, simply contact them and ask. You can also refer to your report for the last date they reported and pay before then.
5. Apply for Another Credit Card
This method will fix your credit in two ways:
The first is that the new credit card will increase the total credit line. As a result, your credit utilization will improve. The other way is if you have a single card with a small loan, having another credit card will show a “credit mix”, a term used by credit bureaus as an indication of whether a borrower can handle various credit accounts without hitches. This will reduce the risk associated with you, thereby allowing the lender’s finding service to offer favorable terms when seeking a mortgage. You should see results around 6 weeks after using this method.
However, this doesn’t mean you should open as many credit card accounts as you can. Multiple accounts may display you as desperate or living way beyond your means and may also hurt your credit score.
Bonus: Applying for another card is a great move toward fixing your credit. However, while at it, don’t close your old accounts. You see, among the factors considered when determining the overall score is credit history.
A new credit card account will not have as much history as the old one, which is why it’s recommended to maintain the old account.
6. Consider Becoming an Authorized Card User
Do you know of a family member or a close friend who has a good standing with their card company? If yes, you may have an opportunity to fix your credit. This is by becoming an authorized card user on one of their card accounts.
This is a simple, yet effective, a method to fix your credit score since you’ll ride on their stellar history. This history will become part of yours, and once this account gets added to your history, it will result in an increase in the age of the accounts you’ve handled.
However, there’s a catch. Just as a good history will reflect on yours, so does a bad history. This means the card owner has to make on-time bill payments and maintain low balances on their card for you to reap maximum benefits. Unlike other methods of fixing your credit, this one offers fast results.
7. Apply for a Loan or a Secured Credit Card
This is for people facing difficulties when applying for the conventional credit card. The difference between the traditional card and a secured card is the latter is backed by a deposit.
Look at the deposit as security for the amount you’ll borrow on the card. This means if you skip payments or default altogether, the deposit will cover the debt, thus lowering the risk on the lender’s end. In addition, you’ll get credit without a credit history. The results from this step will reflect on your report after a maximum of two months.
Take the Next Step
You have poor credit? Don’t let that dim your hopes of owning a home. Instead, embark on an intensive program of fixing your credit. If you practice the tips outlined in this article, you’ll be on your way to favorable mortgage terms in six months.