Planning to purchase a new home soon? It’s the American dream to own a house, but not all aspiring home buyers get to see their dream come true. A common challenge most people face when buying a home is a poor credit score. Here are 10 ways on how to improve your credit score.
With a below-average score, no lender may be willing to work with you, and if they do, the loan interest rates are almost always high. The solution is to start building up your credit score to qualify for better loans with better terms.
What is a Credit Score, and Why Does it Matter?
Table of Contents
- 1 What is a Credit Score, and Why Does it Matter?
- 2 How is a Credit Score Calculated?
- 3 10 Steps to Improve your Credit Score Now
- 3.1 Study your Credit Report
- 3.2 Dispute any Inaccuracies on Your Report
- 3.3 Improve your Bill Payment History
- 3.4 Keep Credit Card Utilization Below 30%
- 3.5 Don’t Apply for New Credit
- 3.6 Fatten Up a Thin File
- 3.7 Resolve any Collections or Delinquencies
- 3.8 Use a Credit Monitoring Service
- 3.9 Consider Debt Consolidation
- 4 What Credit Score Do I Need to Buy a House?
- 5 Make your Next Move with Omni Horizon
By definition, credit score refers to the statistical figure lenders use to determine creditworthiness. Typically, credit scores range from 200-850 where scores above 700 are considered good while those between 600-700 average and anything below 500 is poor.
While some lenders will negotiate with a 500 credit score, mortgage lenders are specific about whom they deal with. For you to get a home loan, in most cases, your credit score must be 650 going upwards.
In addition, if you want a loan with favorable terms, including a lower interest rate, your credit score has to be on the higher side.
For example, raising your credit score from 500-700 could save you $29,000 when taking a 30-year mortgage loan to buy a house worth $350,000.
How is a Credit Score Calculated?
Every bit of information recorded on your credit report comes from either Equifax, Experian, or TransUnion. These three agencies are the primary entities responsible for all things concerning consumer credit history.
What they do is look at your overall financial life, especially anything with credit, to come up with a comprehensive report. These are the five areas they specialize in:
This is the first aspect credit bureaus will look at, and it accounts for 30% of your total credit score. Basically, they check your record of repaying loans you’ve obtained before. These include student loans, car loans, and even house bills that you pay using your credit card. Any late or defaulted repayments in your file immediately lower your credit rating.
How do you use your credit cards? This is the second most essential factor credit bureaus will look at. It implies that if your credit card is maxed out or has high monthly balances; your chances of getting a good credit score are slim.
Length of Credit History
Length of credit history simply refers to how long you’ve been using credit cards or lending services and if your payments are up to date during this duration. The longer and more diligent you’ve used credit cards, the higher your credit score.
Types of Accounts
This section contributes 15% towards your overall score and features all accounts under your name. Here, the credit bureaus look into all accounts you have, including installments accounts and revolving accounts. What they want to see is if these accounts are in perfect condition or have late or defaulted payments. So, the more well-managed accounts you have, the higher your credit score.
If you’ve recently tried to obtain a loan by opening different accounts, it could lower your credit score. This is because an attempt to open several accounts is seen as desperate and could potentially signal financial trouble, which lowers your score.
10 Steps to Improve your Credit Score Now
Raising your credit score to an acceptable figure opens many doors in your life. All creditors will want to transact with you, and they’ll offer favorable terms to do that. It’s not an overnight process to improve your credit score, but these ten tips will make the process much faster so you can get that home loan now.
Study your Credit Report
Studying your credit report closely helps you understand what works for you or against you financially. Take advantage of the fact that Equifax, TransUnion, and Experian all offer free credit reports at least once a year.
Once you have the report on your hand, go through it noting all the areas that could be hurting your credit score. For the most part, you’ll find that it’s either late or missed payments, collection accounts debts, and high credit card balances are weighing you down. Lack of a mix of accounts could also be a major contributor to low credit scores.
Knowing how much debt you have can help you determine your debt-to-income ratio. Learn more about DTI and how it plays into how much house you can afford.
Dispute any Inaccuracies on Your Report
Now that you’ve gone through the report, did you find any errors? About 25% of Americans have errors in their credit reports every year, which lowers their credit score significantly.
According to the Consumer Financial Protection Bureau, you can report credit score errors to the Credit Bureaus via mail or online. Just make sure to enter your correct details and explain the error comprehensively.
Common credit report mistakes you could site include:
- Incorrectly reported accounts (closed accounts mistaken for open).
- Identity errors (misspelled names addresses, or phone numbers).
- Credit limit mistakes and account balances.
You’ll have to wait 30 days for the Credit Bureaus to investigate your claim and confirm with the furnisher before getting back.
Improve your Bill Payment History
Since payment history is a significant factor that credit bureaus look at, any negative signs no matter how small could impact your score. In this case, it’s your monthly bills. Yes, when you fail to pay your bills on time it reflects on the final report, lowering your credit score.
Luckily, even if you lead a busy life, there are simple ways to keep track of bills and ensure they’re paid on time. These include:
- Setting automatic billing systems directly from your bank account.
- Setting alerts for due dates when they arrive.
- Creating a filing system manual or digital to track.
- Charging all monthly bills to a credit card.
Keep Credit Card Utilization Below 30%
Credit card utilization refers to the amount of credit you use with respect to the total limit. For example, if your credit card has a limit of $1000 and you use $400, that’s considered a 40% utilization rate.
The recommended utilization rate at any one point is 30%, especially when looking for a house loan. Figures higher than this tend to read negatively on your credit report and thus, lower your credit score.
Clever ways of reducing your credit card utilization rate include paying monthly balances in full and taking credit cards with higher limits, so the percentage ratio works in your favor.
Don’t Apply for New Credit
Credit bureaus could perform a hard inquiry into your financial life when not satisfied with the information available. Hard inquiries typically depict deeper information about your financial life, which could impact your score.
So, if you’ve applied for several loans within a short period, these could reflect on the inquiry. Last-minute moves such as these are seen as desperate by financial institutions and hence, branded the higher risk tag.
The riskier you are, the lower your credit score will be since it clearly shows you’re in a bad financial spot.
Fatten Up a Thin File
It’s surprising that a record 62 million Americans don’t have a broad-enough credit history to warrant a credit report. It’s even more boggling that most have no idea how to improve their credit history.
There are numerous ways to build on your credit history, such as recording your everyday expenses. Different programs exist for this sole purpose. One option is Experian Boost, which includes your banking history and utility payments on your report.
Resolve any Collections or Delinquencies
Delinquent and collection accounts under your name paint a bad picture since they show you’re incapable of repaying loans in time. Working to resolve these accounts by making payments could slightly improve your credit score, and you may apply for a loan.
This tactic only works best when you have a 600 credit score, but want to take it up slightly to 620 since it doesn’t account for much in your credit report.
Use a Credit Monitoring Service
Credit monitoring is a tool people use to keep track of everything that can impact their credit score. This service mainly focuses on changes made to your credit report, including newly opened accounts and paid-off accounts.
Credit monitoring services give you access to monthly credit score reports from any one of the three credit bureaus. The best part is that monitoring your credit helps prevent identity theft and fraud, which are common in credit reports.
Consider Debt Consolidation
Having multiple outstanding debts is a problem that affects your overall financial life and not just your credit score. If this is the case, the quickest fix could be taking a debt consolidation loan to pay off overdue loans so you can remain with one significant loan.
Alternatively, if you have several credit card balances, use a balance transfer credit card to clear the balances at once. Balance transfer credit cards have a 0% interest rate and therefore, you’ll only pay the loaned sum.
Cleaning up your credit and improving your credit score is just one step to take when you prepare to buy a home.
What Credit Score Do I Need to Buy a House?
To be clear, it’s almost impossible to get a conventional home loan with poor credit since the minimum credit score for a home loan is usually around 620. However, this doesn’t rule you out completely, if your score falls below this figure.
Provided you have a score of 500 and above, there are numerous other avenues to obtain house loans, depending on the loan type. The most common is the Federal Housing (FHA) loan, where a score of 580 could get you a loan with a 3.5% down payment.
Another option is VA loans issued by the Department of Veteran Affairs, which require no down payment at all. The only catch is you must have a minimum score of 580 and be a registered veteran with the U.S Military.
Make your Next Move with Omni Horizon
Now that you’ve taken the steps to improve your credit score and move forward purchasing a home, look to Omni Horizon to walk you through the process.
The real estate market is changing, and you need a strategic partner ready to look ahead of the curve. The agents and brokers at Omni Horizon Real Estate see what’s ahead and is ready to go to work for you when buying or selling a home. We understand what goes into finding the perfect property or the best buyer and have the skills and networks requires to make the connection.
Reach out to Omni Horizon Real Estate now and get started with your next move.