How to Improve Your Credit Score to Buy a House
Ultimate Guide to Improve Your Credit Score
This ultimate guide is dedicated to helping consumers to improve their credit ratings and securing a low-interest loan or mortgage. When you save money on interest charges and insurance, consumers can afford more and live the lifestyle they always wanted. Raise your credit score by paying bills on time including rent, loans, mortgages, taxes, utilities, credit card payments and any other debts that you may have. This approach helps to ensure your credit rating remains high. It also helps to know what your credit score is and what is affecting it.
We cover a variety of topics to help our readers understand their credit situation, how to improve their credit rating, manage their credit utilization, track progress towards improving their credit score and even why it is a good idea to seek help from time to time. Aside from your job and family, managing your debts and credit situation is one of the most important activities for consumers today. You want to make sure you or an authorized user check your credit on a consistent base.
Consumers with an excellent credit score can save themselves thousands of dollars in interest charges. They qualify for lower interest rate mortgages and generally have an easier time with approvals as well. Lenders or credit unions tend to view customers with low credit scores as high risk, and either will not lend to them, or they will charge higher interest rates and ask customers to consider mortgage insurance options to manage their risk. Understanding your credit utilization will save you time and money if you are trying to buy a house.
Understand Your Credit Situation
One of the first steps to take is to understand what your credit situation is. What is your credit rating now and what is impacting your current level? Credit score range is typically from 300 to 850. The majority of credit scores sometimes called “major credit ratings” will fall between a score range of 600 to 750. Having a score above 800 is considered to be excellent credit, and most consumers will have no problems being approved for a loan. Fall below 650 and you are in the fair or poor credit category depending on the credit reporting agency.
When lenders are looking at your loan or mortgage application, they want to see fair credit scores above 650 and low debt-to-income ratio to minimize their risk and make available the best interest rates and terms. Most lenders or credit unions consider bad credit when you are in a score range of 300 to 500. FHA loans require a minimum of 500 FICO scores according to their guidelines. Note: FHA regulations tend to change from time to time.
Get a Free Credit Report
Many companies provide information on your credit reports for free and some that charge for their services. Whenever consumers apply for a free credit report, they should protect themselves by only using recognized credit reporting agencies. Your bank or lender can assist with providing the appropriate web site to use. Be prepared to provide some personal information that will confirm your identity and link you with your credit report or FICO scores.
Credit reports change over time based on your spending habits, loans, and mortgages and your track record of debt and utility payments. Make sure you are always paying bills on time. Also, It is crucial for you to utilize recognized credit reporting agencies to avoid “id theft” or identity theft, be careful and don’t provide your personal information to an unknown credit reporting agency. The perfect way to start building credit is to get a free credit report. Credit Karma has a great mobile app, and they are a very recognized company in the US.
Schedule Automatic Payments and Reminders
The best method of ensuring that you never miss a payment is to schedule automatic payments for all loans and utilities, even your credit card payments. Many lenders will request your authorization to withdraw your monthly loan payment from your account automatically. This ensures that payments are never missed unless there are insufficient funds available in the account. Most financial companies also offer online services that allow their customers to schedule payments to credit cards, utilities, etc. in advance to avoid missing payments.
Take advantage of these services to ensure that you don’t miss any payments. A missed payment or late payment can immediately negatively impact your credit score. Lenders or credit unions consider missed payments as especially relevant when they are contemplating approving a loan application. Don’t let missing payments start hurting your credit score, set up your automatic payments as soon as you get an American Express or any secured credit card.
How is My Credit Score Calculated?
Credit scores are calculated by the various reporting agencies that track consumer credit ratings. They tend to keep the formula secret; however, they provide advice on what factors are most noteworthy and may impact an individuals credit score. Factors such as payment history, the total amount of debt owed, how long your credit history is, applications for new credit or loans, and the type of credit used by the individual. Knowing what your credit score is and paying attention to these areas can make a huge difference in your score. We will talk about each of these areas in a bit more detail.
For an auto loan, credit cards, mortgage loans, and even utility payments can all affect your credit rating. Late payments, missed payments and failure to make payments over several months can have a disastrous impact on your credit score. This is one area where setting up automatic payments can have a positive effect on your score. If you have sufficient funds in your account to cover your payments, your payment history will always be in good standing. Paying on time is extremely important to raise your credit scores, try not to build up the balances on your credit accounts.
Amounts owed also play a significant factor in determining your score. Typically, lenders want their applicants to have their monthly payments for loans, mortgages and taxes to be less than 30% of their gross income. Some will go as high as 35%. Mortgage lenders will determine the debt-to-income ratio by dividing the total amount of personal monthly payments by the monthly gross income. They also consider credit utilization rates which are the amount of your total debt compared to your total available credit. Credit scoring models tend to use this factor to assess how well an individual is doing managing their debt. Other factors may include revolving credit such as credit cards and lines of credit. Maintaining a low balance on credit cards will ensure a low credit utilization rate.
To boost your credit score fast, you should focus on reducing credit card debt, and student loans balances. Debt consolidation is another option to reduce interest payments. Making a balance transfer to a new account can not only fix your credit but also allow you to pay off debt much faster. More so if you have home equity, you can apply for a home equity line of credit or HELOC as a debt consolidation strategy to reduce the amount of high interest that credit cards typically charge. Talk to your financial advisor about your personal finance to see what can you do to boost your credit score if your credit rating is under the minimum guidelines.
Length of Credit History
The type of credit, the number of accounts including credit cards, and the age of these accounts can affect your credit score. Consumers with longer positive histories tend to do well in this category. Younger individuals with little to none history of borrowing using credit cards or loans will score lower. Consumers with no credit history should apply for a credit card with a card issuer, use it regularly and make sure you are paying on time each month to begin establishing a credit history. Also, if you routinely change credit cards, have a lot of credit cards with short histories, this can also negatively impact your score. Maintaining a stable credit history over time will positively impact this particular score area.
Applying for and opening new credit accounts such as credit cards, an auto loan and lines of credit within short spaces of time can also negatively impact your credit score. New credit card accounts or secure cards are straightforward to open. We are constantly bombarded with credit card applications which can be very tempting with a free balance transfer, zero interest for six months, no annual fees or a very low-interest auto loan. Even though the interest rates and other features are attractive, opening several new accounts within short spaces of time can negatively impact your credit score. The fact that car insurers started using credit scores after the ’90s does not matter. Applying for a new auto loan does affect your credit.
Type of Credit Used
Credit such as secured loans and mortgages are treated differently than loans and credit cards that are unsecured. Secured debt is considered to be lower risk debt by many lenders. Credit cards and lines of credit can contribute favorably to your score by improving your credit utilization ratio. For example, a line of credit approved for $20,000 with only $5000 utilized has a credit utilization ratio of 25%. Add up all of the debt that you are currently carrying. Next, add up all of your debt limits approved on your credit cards, loans and lines of credit. Divide the total debt by the total debt approved number to arrive at a credit utilization number. Many lenders like to see utilization ratios of 30% or less and a low debt-to-income ratio.
How Can I Increase My Credit Score Fast?
Missed payments or a collection account will continue to exist on your credit score for up to seven years. However, their importance will decline over time. Whenever you apply for new credit or credit card with a card issuer, there is an inquiry to your credit report. Consequently, records of these inquiries remain on your credit report for up to two years. Applying for many credit cards or loans can negatively impact your credit score as well. Most of all new credit improves your overall credit utilization ratio.
Focus on paying all payments on time, reduce credit applications, avoid closing credit card accounts to maintain credit utilization and fix any other credit issues you may have. Pay all of your collection account or delinquencies immediately. It will take time to improve your credit score depending on the problems that contributed to the negative score in the first place.
Credit monitoring is essential if you want to raise your credit fast. You want to reduce the number of credit inquiries and only run your credit if necessary. Also, if you have bad credit and you need to build your credit fast, you can talk to a credit repair company or specialist in your area. People that offer credit repair services can present you with a reliable debt consolidation strategy to fix your credit. By working with a professional, you can end up spending less from your savings account.
Reduce Balances on Your Credit Cards
Reducing the balance on your credit cards will demonstrate your commitment to dealing with your debt, and it will also improve your credit score and credit utilization ratio. Some people feel that they should cancel credit card accounts they do not need; however, this action will make your credit utilization ratio worse since you now have less unused credit. Consumers who try to improve their credit rating should always pay down the balances and then retain the accounts. They must also have the will power to avoid using this unused credit.
Paying down your credit cards will also help to reduce the total amount of interest that you pay on a monthly base. As your credit score improves, consumers will also be able to borrow funds at better interest rates.
Note: If you have a rewards card, you can apply the cash rewards towards the balance on your rewards credit cards to reduce the amount owed.
Fix Credit Issues and Pay any Delinquencies
One of the most significant barriers in building credit is existing delinquent situations that have been reported to the credit reporting agencies. Whatever issues they may be, consumers need to deal with them and pay anything that they owe. Once everything is caught up, it may take several years to clear an error on your credit depending on the issue. Dealing with an item as quickly as possible will start the clock towards improving your score. Delinquencies will remain on your credit score for seven years. Bankruptcies can stay on your report for up to 10 years, and inquiries for credit approvals can remain on your score for two years.
How long does a collection account stay on your report?
Negative information or a collection account can stay on your credit report for up to seven years.
How to remove a collection account?
Working with professional credit repair companies is the way to go when it comes to negative information on your credit report. Most of the credit repair agencies have experience with extreme credit situations, and they understand the process.
If you want to remove it on your own, you want to start by obtaining a free credit report from all the major credit reporting agencies (Equifax, Experian, and TransUnion). By collecting the credit reports from these three major credit bureaus, you can identify what is reported on your credit file. After you have the information about the collection account and the agency, If you have already paid the debt, or if the report was open by mistake, you can dispute the transaction with the credit bureaus.
Otherwise, you can start by asking the collection agency to validate the debt owed. According to the Consumer Financial Protection Bureau regulations the collection agencies have 30 days to validate the debt. If they fail to do so, you can file a complaint. Make sure you create a document trail to provide proof.
If the above step does not work, don’t lose hope, you can still dispute the account or try to arrange a “Pay for Delete” agreement. Even though Credit Bureaus do not allow this type of practices anymore, you might get lucky and find a company that would remove it. We strongly recommend working with a credit repair company to resolve negative information or significant problems on your credit.
Things to Avoid When You’re Trying to Increase Your Credit Score
If you are trying to improve your credit score, there are a few things to avoid to see your credit score improve and does not get worse. For example, avoid closing credit card accounts or lines of credit to prevent a negative impact on your credit utilization. Keep the accounts open and avoid using them. If you do plan on using a credit card after you have paid the entire balance, always arrange to pay the new balance on or before the credit card statement due date. You will maintain your credit utilization factor and demonstrate that you are paying your credit card balances on time and in full. There is no need to carry a credit card balance to build your credit rating.
Always avoid late payments or delinquent payments. Your credit record is updated, and these reports will stay on your credit report for up to seven years. Your credit score will decline, and the record will be on your report for all lenders to review. Pay everything on time. Another area to avoid is the attraction of settling an account for less money than you owe. It may be attractive to pay less than what you owed; however, if you value your credit score focus on paying the full balance to demonstrate that you meet all of your obligations in full. Of course, if the alternative is bankruptcy, then agreeing to a partial repayment is still better than bankruptcy from a credit rating perspective. Make sure you pay your bill on time.
Note: “Cash back credit cards will allow you to apply the rewards towards the amount owed.”
Every time consumers apply for a new credit card, a car loan, personal loan or a mortgage there is a hard inquiry made on their credit report. Too many credit inquiries can negatively impact credit scores. Avoid applying to too many lenders or credit card companies to be approved for credit. Each inquiry will remain on your report for two years.
Credit utilization is another vital factor that contributes to your overall credit score. Lenders and credit card companies also consider this ratio before approving additional credit. Credit utilization is calculated by adding up all of the outstanding debt on all credit cards, car loans, mortgages, etc. and dividing by the total of all approved credit. For example, if you have an American express approved for $10000 and a line of credit approved for $10000, you have a total approved credit limit of $20,000. Let’s assume that you also are carrying a balance on your credit card of $2500 and $2500 on your line of credit for a total debt of $5000. Your CU factor would be 25%, which would be well within the range of 30% that many lenders look for.
Therefore, credit utilization emerged as a measure of creditworthiness because many people carry many credit cards. They are inundated with special deals to sign up for these cards and never close them. Many consumers do not use their cards, and they should avoid closing unused cards. By closing a credit card, it would lower their credit utilization number and reduce their credit rating. Keeping your credit utilization below 30% will contribute to maintaining your credit score. Talk to one of our real estate agents for more information about the importance of credit utilization. Look into debt management programs to learn to keep your debt-to-income ratio low.
Keep Track of Progress and Get Professional Help
If you’re having difficulty navigating the credit score challenges, some times it helps to seek help from professionals. Before you do, gather all of the relevant information and summarize it as follows:
- Total monthly income
- Credit cards providing approved limits, current balances and monthly payments
- Loans providing total owed and monthly payments
- List asset values for homes, cars, etc.
- Current credit report
Professional advisors will review all the information and help a consumer improve their credit score and deal with debt. Eventually, they will find new solutions and recommend steps to take to improve your credit score and debt situation. Let them know what your plans include such as purchasing a home and how important it is to improve your credit score to enable a more attractive interest rate on a mortgage. With all of the information that a professional adviser can provide many consumers will save a great deal of time and money as well as see your credit score improve. You can raise your credit scores or FICO scores in months instead of years.
We have mentioned several times in this report that consumers should not close existing unused credit card accounts. Any changes could negatively impact their credit utilization numbers or their credit score. It is important also to remember that when you are trying to improve your credit score to also not apply for new credit. By doing that it could generate hard inquiries on your credit rating which can lower your overall score. Focus on paying off debt and reducing your monthly payments to improve your cash flow.
A professional advisor can assist in all of these areas. They can create a road map for their customers to help them improve their credit rating over time. This will lead to improving their overall debt situation.
8 Benefits of Having a Good Credit Score
The benefits of having a good credit score are not just limited to lower interest rates and fast approvals for loans. The benefits include:
- More negotiating power with lenders
- Lower interest rates
- Improved probability of being approved for a loan or credit card
- Approval for higher amounts on credit cards and loans
- Approval for renting an apartment, house or condo
- Some jobs require higher credit scores
- Approval for various rentals with lower security deposits
- And of course bragging rights
We will examine two of these benefits in a little more detail.
Get Lower Interest Rates
Lenders or credit unions typically view consumers with lower credit ratings as high-risk clients. They compensate for this risk by charging a higher interest rate on loans. Lenders also compensate by lower credit card approval levels and lower loan values. A higher interest rate could add hundreds of dollars to a mortgage payment. Eventually, this limits the value of the home that the borrower is going to purchase. Mortgage companies will typically not approve a mortgage if the monthly payments for principal, interest, and taxes are more than 35% of the person’s income. Higher interest rates mean higher monthly payments and lower overall mortgage approvals. To save a lot of money in the long run, all you have to do is improve your credit score.
Get Loans Approved Fast
Consumers with low credit scores sometimes have to suffer through multiple applications before being approved for a high-interest loan. These applications also trigger inquiries on their credit score which also has a further negative impact on their credit score. Anyone with an excellent credit score can often obtain approval for a new credit card or new loan. They can get approved on the spot with low-interest rates. Combine an excellent credit rating with a large down payment on a home, and they breeze through the approval process for a mortgage.
Identity theft protection and Financial advice
Believe it or not, people are still victims of identity theft. It is imperative that you protect your personal information like Social Security Number, cell phone, email, and address. Also, only work with recognized companies and professionals, talk to your local real estate agent for referrals. To prevent id theft, you can check the Credit Bureau “Experian,” they offer an identity theft monitoring and protection plan which includes an id theft insurance.
Talk to your financial advisor he can help you with many things including opening Roth IRAs account, mortgage loans, savings account, checking account and even credit repair advice. Make sure you always read the advertiser disclosure from all the credit repair companies before you provide any personal information. For more details about mortgages, start by using a loan calculator to get a broad idea of what monthly payments and interest rates to expect.
In conclusion, consumers planning to purchase a home should ensure that their credit rating is in good standing. This will give consumers better mortgage approvals at low-interest rates and quick approvals. They can start by obtaining their credit report, analyzing it and establishing a plan to improve their credit score. Always meet all payment obligations on time and use automatic payments and reminders to avoid missed payments. Consumers can focus on several areas to improve and maintain a good credit score above 650.
Here are the five best tips to improve your credit score:
- Correct any errors on the report
- Pay down debt as quickly as possible
- Avoid closing accounts to maintain credit utilization below 30%
- Maintain monthly debt payments at no more than 35% of monthly income
- Seek professional help to simplify your debt situation
The benefits of maintaining a good to high credit score are numerous. Some of the most important benefits are qualifying for low-interest mortgage loans or business loans. Credit monitoring can save consumers thousands of dollars. Fast approvals, rental application approval, and even some jobs require good credit ratings. Although it may seem complicated and yet mysterious, if you can improve your credit score you can pay big dividends in terms of reducing interest costs.
Also, visit our homepage, and I hope that you enjoyed this ultimate guide on improving your credit. Be patient improving credit takes time.