If you’re considering the purchase of a home, you know that a great deal of your success will hinge on your credit score. If your score is too low, most lenders won’t give you a second glance. Even if your credit is decent, you may not be approved for a home loan, or you might find yourself saddled with a high interest rate, which leaves you paying thousands of dollars extra over the life of the loan. Improving your credit score is vital, but how do you do that, exactly?
Know Your Score Now
You can’t make improvements if you don’t know where you stand, so make sure that you know what your credit score actually is. While you’re entitled to a free credit report every year from each of the three major credit bureaus, your score is not included in that. You’ll need to pay a fee to find out what your score is. Once you know your current score, you can start rebuilding it, and you’ll know exactly where you’re starting from.
Look for Errors
Your credit score is based on the information provided by creditors, lenders, credit card companies and others. However, there’s no guarantee that the information in your credit report is correct. Get a copy of your credit report from each of the three credit bureaus (Equifax, Experian and TransUnion), and scrutinize them for errors. If you find erroneous entries, you’ll need to work with the credit bureau to have them removed.
Pay Down Debts
This is the part that might take some time. Your credit score is based at least partially on the amount of debt you’re carrying. Take the time needed to pay down those debts. Again, depending on how much debt you have, this can take time. Start with smaller amounts – lower limit credit cards and the like can lift your score quite a bit when you pay off the balance. Ideally, you’ll pay down all of your credit card balances so that the amount you owe doesn’t exceed 30% of your total limit per card.
Handle Delinquent Accounts
Have you let any accounts lapse? If so, those are major black marks on your credit. You’ll need to pay them off completely. If the account has been charged off and is still showing on your credit report, you’ll need to negotiate to have it removed.
Keep Paying Bills on Time
If you’ve struggled to pay your bills on time in the past, you’ll need to spend some time making timely payments. Any late payments will be noted on your credit report, and will reduce your overall credit score. It can take time for timely payments to push down those late payment notifications in your credit history, but eventually, they’ll move toward the bottom of the list, and even drop off. You’ll want to make all of your payments on time for at least six months before you talk to a lender, though.
No New Debt
In the lead-up to applying for a mortgage, you’ll want to avoid taking on any new debt. You’ll need to avoid even applying for new debt. That means not opening any new lines of credit, not applying for credit cards, and no new auto loans.
Improving your credit isn’t something that happens overnight. It takes time, commitment and dedication. However, by carefully monitoring your credit report, removing disputed items, and paying down outstanding debt, you can make yourself a more appealing candidate for lenders. Even if you’ve had a bankruptcy or a foreclosure in your past, it is possible to get a home loan.