If you’re thinking of home ownership in the next year, now is the time to improve your credit score. There’s no quick fix to repairing damaged credit, but there are positive actions you can take starting now. Pull your credit report at Annual Credit Report.com and go over it very carefully.
Why You Need To Improve Your Credit Score
Ensuring that your credit report is free of errors and that it contains mostly positive information makes you a credit-worthy consumer. That makes yoyour banker’s favorite kind of customer and gives you the confidence to bid on the home you want at an interest rate you can afford.
Your banker will look at your past credit history to make a judgement about your ability and willingness to re-pay a loan. The longer and better your credit history, the better your chance is for mortgage approval. Positive information goes a long way for loan consideration, so if you have negative items, you should work to correct them. The better your credit score, the better your loan terms and the easier it will be for you to obtain a loan
It takes time to improve your credit score, but a positive bump in your credit score should appear within a few months when you check off the following items.
Check For Errors
Look for inaccurate items and contact the creditor to request to correct them. You may have to pull old records and make multiple phone calls, but if something is truly in error, then you should be able to have it removed. Stay professional and courteous when contacting creditors, current and former. Remember, it’s in your best interest to have the item corrected, so be nice, even if the creditor made an error.
Address Negative Items
Accounts in active collections and judgements are major negative items in your credit history. If you have either in your history, you should arrange to pay them as quickly as you possibly can. Judgements can result in wage garnishments and this reflects very poorly against your personal history. Judgements stay on your credit report for seven years. Improve your credit score by paying off negative items before they make it to your credit report.
Credit Card Balances
Having credit cards is not all bad. The bank is going to review your credit utilization ratio as well as your debt-to-income ratio. If you have too many open accounts, they may count both against you if they’re too high. However, showing that you are a savvy credit consumer by paying them off quickly and on time gives your report valuable positive history. If you can’t pay your cards off immediately, then be sure to pay them all on time, and always pay more than the minimum payment due. If you are over your limit, pay the amount that exceeds your limit as soon as possible.
Avoid Opening New Credit Accounts
Every time you open a new account, it’s noted in your credit history. During the year that you are working on improving your credit, try to avoid opening new accounts. While the credit reporting agencies generally give you a grace of 30-45 days when they see you’re shopping for a mortgage loan, it’s considered a “hard’ inquiry and will show up on your credit report. Automobile loans and lines of credit are hard inquiries as well, and even though it sounds unfair, all those inquiries hitting your credit report during the same time frame can cause a moderate decline in your credit score. Wait for the new car and furniture until you’ve got the mortgage under your belt.
Save Like You Mean It
Save as much as you can, as often as you can. Banks want assurance that you’re not going to be financially stressed when paying back your mortgage. Your lender is going to request your bank statements to determine that your assets have been “sourced and seasoned.” They will want to confirm where your funds are coming from and how long they’ve been in your possession. They want to see that your accounts are in good standing and that the money in them truly belongs to you, so they will often request two or more months of statements. Lenders also like to see savings when they’re reviewing your application for a mortgage. They’re comfortable lending to you if they know you have a cushion for unexpected expenses.
The Bottom Line
It’s important to improve your credit score before searching for a new home. Good lending terms make the loan process easier and gives you confidence to find the best home for you and your family.
Creating good financial habits like paying every bill on time every time will naturally improve your score over time. It took more than a month to earn those dings in your credit history, and it will take time to correct them. By starting now, you’re giving yourself time to work on improvement. Stay positive and keep the course. Before you know it, you’ll start seeing your hard work pay off with a better credit score.