credit-score-chips

Buying a home is an exciting time in your life, but there are things that can cause the process to be painful. The worst one is finding out that your credit isn’t up to par, and you won’t be able to get a loan with a good interest rate. Or even worse, you won’t be able to get a loan at all!

For the purposes of getting a home loan, a good score is anything above a 760.The key to having a good score is to follow three simple rules:

  1. Pay your bills on time.
  2. Keep your credit card balances low.
  3. Don’t open credit you don’t need.

It is not possible to increase your credit score in days. For most people, the process will take several months. That is why I suggest that you plan way ahead.

If you already have a score above 760, be sure to follow the three rules above, but also take a look at the following items to keep from making a mistake that will cost you points between now and the time your lender pulls your scores. If your score is below 760, following these tips will help you increase it so that you can find more favorable home loan terms.

1. Get Your Credit Report

Good credit or bad, the first thing you need to do is get your current credit report. This way, you can be aware of your score and of any potential problems. You can get a free one each year by going to www.annualcreditreport.com.

2. Fix Mistakes

Mistakes happen. In fact, the Federal Trade Commission has found that 20% of US consumers find an error in their report each year. If you find an error, you need to follow the instructions on your report for how to file a claim to have them fixed. You should receive a response in 30 to 60 days. Be sure to keep all documentation that you send. Some errors can include late payments that weren’t late, credit that isn’t yours, accounts that are no longer open, and more.

3. Explain Negative Information

If you have negative information on your report, you can make a statement explaining why it happened. This is a good way to let lenders see what happened and why you think it won’t happen again. The lender may not see this information if they only look at numbers, but having it on the report can be beneficial if you are on the borderline between good credit and excellent credit.

4. Pay on Time

If you’ve been missing payments, stop! If you never miss payments, continue on. The older a late payment is, the less it affects your credit score. So, if you are trying to make your credit better, a year’s worth of on-time payments can increase your score approximately 50 points. If you miss a payment, it can decrease it that much as well.

If you have any accounts that are behind, pay them immediately. Although they will still be on your credit report, late payments are better for your score than unpaid debts.

5. Get Rid of Some Debt

The more debt you have, the lower your score is going to be. Credit companies look at your debt-to-credit ratio. In other words, how much debt do you have in comparison to your total credit limit. So, if you have $2,000 of debt with a credit limit of $3,000, then your debt-to-credit ratio is $2000/$3000 or 67%. If you have the same $2,000 in debt but have a credit limit of $10,000, your ratio is $2000/$10,000 or 20%.

The way to make your ratio better is to pay down on your debt so that your ratio is low. Most professionals suggest that you keep this ratio below 30%. You might be tempted to add credit instead of reducing debt to make your ratio better, but remember the key above – only get credit when you need it. Adding credit cards lowers your credit score in other ways!

6. Pay More Than the Minimum Due

Although paying the minimum amount is better than paying late, it does not make you look creditworthy to anyone looking at your credit report. It is always better to pay more than the minimum due, even if it is only $10 more.

7. Don’t Make Big Purchases

If you are planning to buy a home, do not buy anything big on credit in the year leading up to your purchase. This could be something like a car, a vacation, or even furnishings for your new home. Although this won’t affect your credit rating, it will affect your debt-to-income ratio and could keep you from qualifying for a loan.

8. Have At Least Three Lines of Credit

If you want to qualify for a conventional loan, you will need at least three lines of open credit. These can include credits cards, student loans, consumer loans, car loans, or store credit cards. FHA loans require two lines of credit. It is perfectly fine to have more than what is needed but be sure to have at least the minimum. These need to have been active for at least 12 months and some banks prefer to see 24 months of activity.

9. Don’t Close Old Accounts

Older accounts help boost your credit score. Getting rid of older accounts will actually make your credit score go down. The best thing to do is use your credit cards every 2 to 3 months. Buy something you would have paid for in cash and then pay the credit card balance in full. This shows active accounts and gives you a good payment record.

10. Don’t Open New Credit

Unless you don’t have enough credit lines, do not open any new credit at least 6 months before applying for a home loan. Each time you open a new account, your credit score is temporarily lowered until the credit bureau sees that you are using your card wisely. If you must have more credit, consider increasing the credit limit on a card you already have.

Having a good credit score is essential when trying to find the best home loan. Following these 10 tips will help you have the best score possible. If you have any questions concerning these tips or would like help finding a professional to discuss your finances with you, please contact me. I’d be happy to help.