Achieving a great credit score unlocks numerous advantages, especially when you’re on the journey to buy a home. Not only could you secure mortgage rates with lower interest, but navigating the home buying process can be smoother with a higher score. While the credit score required varies by loan type, typically ranging between 580 and 620, aiming for the highest possible score is always beneficial. Before we dive into the six steps to mend damaged credit, let’s learn a bit more about credit scores and how you can pave the way to successfully purchase your dream home.
A credit score is a numerical representation of your financial responsibility. High scores indicate to lenders that you’re reliable, paying bills on time and managing loans wisely. Conversely, low scores might signal to lenders a potential credit risk, due to missed payments or excessive borrowing.
The major credit reporting bureaus—Equifax®, Experian™, and TransUnion®—compile your financial behavior into a credit score. While your scores from each bureau may slightly vary, they generally paint a similar picture of your credit health.
It’s a common misconception that your annual free credit report includes your credit score—it doesn’t. However, many services and credit card companies offer free credit score access to their customers. For your free annual credit report, which is crucial for spotting potential inaccuracies affecting your score, visit AnnualCreditReport.com. You could search for new companies offering a free credit score. At the time of writing this, many people use www.creditkarma.com which provides two score. These score are not always accurate but can be a good start to knowing where you stand.
Your credit score is a combination of data from all three of the credit reporting bureaus. Each bureau may give you a slightly different score depending on which lenders, collection agencies, and court records report to them, but your scores should all be similar. The following is a rough breakdown of how credit bureaus calculate credit scores:
Payment history (35%): Your payment history includes factors like how often you make or miss payments, how many days on average your late payments are overdue, and how quickly you make an overdue payment. Each time you miss a payment, you hurt your credit score.
Current loan and credit card debt (30%): Your current debt comprises factors like how much you owe, how many and the types of cards that you have, and how much credit you have available. Maxed-out credit cards and high loan balances hurt your score, while low balances raise your score – assuming you pay them off, of course.
Length of your credit history (15%): The longer your credit history, the higher the probability that you’ll follow the same credit patterns. A long history of on-time payments improves your score.
Account diversification (10%): Creditors like lending to borrowers who have a mix of account types, including home loans, credit cards, and installment loans.
Recent credit activity (10%): When you open a bunch of cards or request a sudden increase in credit, creditors may believe that you’re in financial trouble. Don’t apply for multiple accounts at once, or your credit may take a hit.
Here is a 6 step guide to improve your credit. Keep in mind that everyone is different and that you should consult with a professional credit repair agency for what the best steps for you may be.
Before you start repairing your credit, review your credit report for any errors. Errors on your report can negatively impact your credit score. Common errors include accounts that don’t belong to you, incorrect payment information, or outdated credit utilization data. If you find any errors, report them to the credit bureau for investigation and correction.
Payment history plays a significant role in determining your credit score. Make minimum payments on time and pay off outstanding credit card balances before the due date. Set up payment alerts and consider automatic payments to help you stay organized and avoid missing payments.
Lowering the amount you owe on your credit cards can have a positive impact on your credit score. Create a list of your debts and find areas in your budget where you can reduce spending. Even small amounts put towards debt reduction can gradually improve your score. Avoid using credit cards excessively while paying off your debts. Keeping balances below 30% usage is ideal but even below 70% can help.
If you have a close family member or friend with good credit, you might ask them to add you as an authorized user on their credit card. As an authorized user, their positive credit history and responsible credit card use can help improve your credit score. However, it’s important to ensure that the primary cardholder has good credit habits and keeps low balances on the card.
Credit counseling agencies can provide professional assistance in analyzing your finances and offering solutions for debt and credit issues. Choose a reputable agency and inquire about fees, pricing, and the services they provide. Nonprofit credit counseling agencies, such as those affiliated with the National Foundation for Credit Counseling, are often a good option.
Once you understand your credit score and the steps needed for repair, establish a plan to improve your score. While a higher score is always better, most consumers aim to reach a “good” (670 to 739) credit score threshold or above. Remember the credit score ranges and the benefits associated with each range. Set realistic goals and make consistent efforts to improve your credit over time.
Repairing your credit takes time and dedication, but it’s worth the effort, especially when you’re preparing to buy a home. By following these steps, you can take control of your credit and improve your chances of securing a favorable mortgage rate. Remember, be patient, and don’t hesitate to seek professional assistance if needed.
When your credit is pulled for a mortgage (or other loans) you may get bombarded with phone calls with offers. This can lead to confusion and has been known to push buyers back to just renting because of the annoyance. Below is a great start to combating this.
Call 1-888-5-OPTOUT (1-888-567-8688) or visit www.optoutprescreen.com to begin the process. By opting out, you can prevent companies from accessing your personal data, such as your home telephone number, name, Social Security number, and date of birth. Rest assured, the information you provide is strictly confidential and will only be used to process your opt-out request. Remember to verify the site’s security before entering any personal details—look for the lock icon on your browser or a web address that starts with “https.” Your request will be processed within five days, though it may take up to 60 days for prescreened offers to stop arriving. If you have a joint mortgage, both parties need to opt out to halt these offers. And if you ever decide to opt back in, you can use the same telephone number or website.
Join the National Do Not Call Registry:
Put an end to those pesky telemarketing calls by registering your phone number with the federal government’s National Do Not Call Registry. Simply visit www.donotcall.gov or call 1-888-382-1222 from the number you wish to register. Within just 31 days of registering, you’ll notice a significant reduction in telemarketing calls. Once registered, your number will remain on the registry for five years, until it’s disconnected, or until you choose to remove it.
