The first, and most important, thing lenders will look at is your credit score. Your credit score will determine whether or not you will be eligible for a mortgage and will also impact the interest rate on your new home loan.
If your scores are above 760, you are likely to get the very best rates. If they are anywhere below that number, you have room for improvement. Perhaps your credit is OK, but you’d like to make it even better. The better your credit score, the less you will pay in interest and, typically, insurance.
If you have damaged credit, unfortunately, there’s no quick fix. Be very leery of any company that tries to sell you services that claims such. By getting on the straight and narrow and managing your credit responsibly over time, you can improve your score and mitigate the damage done.
Here are some proven steps that will help you improve your credit score:
Review your credit report
First and foremost, find out where you stand. You are entitled to a free credit report once per year, but if you want to see your FICO scores, you will have to pay. Some sites, such as, Credit Karma will give you scores, but these aren’t typically the scores that lenders use.
The three main credit-reporting agencies are Equifax, Experian and TransUnion. You can go to www.annualcreditreport.com to obtain your free copies electronically, call the toll-free number at 877-322-8228, or send a request to: Annual Credit Report Request Service P.O. Box 105281 Atlanta, GA 30348-5281 877-322-8228.
You can buy two of your three FICO credit scores for $19.95 each at MyFico. Unfortunately, Experian, no longer sells FICO scores to consumers, although it still sells them to lenders.
Identify and Correct any Errors or Inaccuracies
The Fair and Accurate Credit Transactions Act states that if you can prove the error, in your favor, the credit reporting agency (CRA) and said creditor must make the necessary corrections at no cost to you. If you discover a mistake, contact the consumer bureau and creditor immediately. Once proven, the mistake must be repaired within 30 days.
Remove Old Information
Make sure any negative information (7 years or older) doesn’t appear on your report. By law, negative information on your credit report must be removed after seven years (10 years for bankruptcies). You can write the CRA and ask to have it removed. Please also take into account any creditors that delayed reporting an error. If the actual occurrence happened 8 years ago and it took them a year to report it, you can explain that the debt is actually older than 7 years and ask to have it removed. Be sure to include any supporting information or paperwork that confirms your claim.
Include Hardship or Supporting Information
If there is a negative mark on your report (such as non-payment of a debt), but you have a valid reason for not paying the debt (i.e., merchandise was never received), you can write to the CRA and ask them to add your brief explanation to your file. If the lender pulls your credit report they may, or may not, see the additional information, as some simply look at credit scores; however, it can only help, not hurt.
Pay your debts on time!
This is critical! Be sure to pay every bill on time from this point forward. The older a late payment is, the less it will hurt you. If you do not make any late payments for a year, your credit can improve up to 50 points within that year.
Paying Down Your Debt
Paying down your debt will increase your score. The more debt that you carry, the lower your score will be. Your debt is evaluated in comparison to your total available credit. It is best to have balances below 30% of your credit limit on each card (below 10% is even better). For example, if you have a credit limit of $10,000, you should have a balance of no more than $3,000. If you need help keeping track, many credit card companies will allow you to set up alerts (via email or text) when you’re approaching a limit that you have set.
Pay Any Outstanding Debts
It is important to pay any debts that may have been sent to collections. If you have a delinquent account, it is in your best interest to pay it. Paying it won’t have it removed from your file, but it will help your score. Having a late payment is much better than having an unpaid debt.
Get Credit, if You Don’t Have Very Much
Obtain and use a credit card. In general, you will need to have and use at least one credit card in order to have a good credit score. If you don’t have a credit card, although that’s commendable, you should get one and use it responsibly. You can use it to buy groceries or gas and then pay it off in full every month. On a side note, this can help you in other ways as well. Many credit card companies offer incentives like airline miles or cash back!
If you can’t qualify for a regular credit card, consider getting a secured credit card, where the issuing bank gives you a credit line equal to the deposit you make. Be sure to look for a card that reports to all three credit bureaus.
Add an installment loan to the mix
You’ll get the fastest improvement in your scores if you show you’re responsible with both major types of credit: revolving (credit cards) and installment (personal, auto, mortgage and/or student) loans.
If you don’t already have an installment loan on your credit reports, consider adding a small personal loan that you can pay back over time. Again, you’ll want the loan to be reported to all three bureaus, and you’ll probably get the best deal from a small community bank or a credit union.
Credit scores improve with time, if managed properly. As discussed earlier, the older a late payment is, the less it will hurt you. On the contrary, the older a credit card account is, the more it helps you.
Don’t Pay for Credit Repair Services
The things we’ve discussed in this blog post are the only things you need to do to repair your credit. Stay away from companies promising to help you for a fee. This will not only hurt your wallet, but can also further damage your credit!
In summary, all you really need to do to improve your credit score is this: Correct any errors, get old negative items removed, maintain a good payment history and don’t max out your credit cards!
Feel free to contact me if you have any questions, as we work with many lenders, banks and institutions that will help get you on your way to home-ownership with the best possible rates!
As always, if you are in need of real estate services (whether you are looking to buy or sell), or know someone who is, please feel free to contact me. My team and I are available to serve you seven days a week!
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