Improving Your Credit Score Prior to Purchasing a New Home
A three-digit number affects so many aspects of your financial life from your odds of getting approved for a loan or a credit card, to your interest rate, to your insurance premiums and even your employability. That is because your FICO credit score, which is used by most lenders, represents your ability to pay back a debt. A less-than-stellar rating or late payments on your report can ruin your dream of qualifying for a home. Thankfully, if your FICO score is lower than you’d like, nudging it upward isn’t difficult. Follow these steps and you should see improvement in as little as a year.
1. Review your credit report for accuracy
There are many sites that ask you to pay to get a copy of your credit report, however www.annualcreditreport.com offers you all three reports for free once a year. Review your report for accuracy and make sure that all your accounts are correct. If you see an error on one or more report, you will need to contact each agency (Experian, Equifax and TransUnion) to correct the errors.
2. Find your credit score
Again, there are a lot of sites that will ask you to pay, however www.creditkarma.com will provide you with your score for free. Generally speaking, anything above 740 puts you in the “very dependable” category, while a score below 670 tends to be rated as subprime. Either way, they are easy ways to make improvement in both areas.
3. Continue to pay all your bills on-time
Approximately 35% of your FICO score is based on your payment history. To make sure you don’t ever miss a due date, consider automating your payments for utilities, student loans, auto and credit card payments. Stagger them, if possible, to avoid a massive outflow and coordinate them when you get paid.
4. Reduce your debt
Another 30% of your FICO score is based on the amount that you owe. Lenders are particularly mindful of your debt-to-credit ratio. Prepare to get dinged if you use more than 30% of your available credit limit.
5. Up your credit limit
If your debt-to-credit ratio needs improvement, paying down the debt is the best solution. However, if you are unable to pay it down right away, consider calling the creditor and asking them for a credit limit increase. This will decrease your debt-to-credit ratio and increase your FICO score.
6. Be aware of excessive hard inquiries
When you apply for a new credit card, it is standard for the proposed lender to check your credit report before extending an offer. That is considered a hard inquiry. While applying for a credit card won’t matter much, four or five inquires within a year could seriously hurt your score. Just keep that in mind before you say “yes” to a retailer tempting you with a credit card offer at the checkout line. Please keep in mind, that while shopping around for a competitive mortgage or car loan often causes several hard inquires within a short period, these will generally count as a single probe for the purpose of your score. And checking your own credit report doesn’t count against you either.
Make no mistake in trying to clean up your credit, many people start canceling old credit cards. DON’T. Shredding your oldest credit cards shortens your credit history, which is responsible for about 15% of your FICO score. If you really want to cut back, eliminate non-bank cards, such as retail cards first. Then, cancel and cut up those you’ve had for the least amount of time, because long standing cards with a solid payment history will help your score.