How Your Personal Finance Habits Impact What Home You Can Buy
How Your Personal Finance Habits Impact Your Homebuying
It can be difficult to purchase or refinance a home with a bad credit score. This leads people to ask: is there anything I can do to quickly fix my score? Many people with bad credit think there is no foreseeable way to improve their situation. That’s simply not true.
Depending on your situation, you might be able to improve your credit score by 100 points in fairly short order.
Check Your Credit Report
This might surprise you, but lenders and credit reporting bureaus make mistakes. When they do, it’s rarely in your favor. And more often than not, their mistakes hurt your credit score.
So what can you do? Run a free credit check, then verify the accuracy of your credit report. By law, you are allowed to request a free credit report from each of the three major credit reporting bureaus: Experian, Equifax, and TransUnion. We suggest requesting your credit report from AnnualCreditReport.com, as it is the only online source for free credit reports authorized by U.S. law.
What should you look for in your credit report? Start with outdated information. Items such as late payments, bankruptcy, foreclosure, or loan delinquency can only remain on your credit report for seven years.
Also, look for any payments that have been marked late when you paid them on time.
If you find errors, you will need to file a dispute to have them removed. Once you file a dispute, the credit bureau will have 30 days to investigate and respond.
Keep Your Credit Cards Open
When people are rebuilding their credit score, they often hear that it is a good idea to pay off a card and cut it up.
Cutting up the credit card is OK, but what you don’t want to do is cancel the account or give the lender a reason to cancel it.
Lenders like to see borrowers with long-established credit histories. In fact, your credit history is a primary factor in establishing your FICO credit score. If your credit lines and loans only date back a few years, it is tougher to earn a good credit score.
Let current lenders continue sending you a statement each month showing a $0 balance. In some cases, you might have to use the card occasionally so the lender doesn’t cancel your account. This means making a simple purchase and paying it off right away. Also, always make sure the credit cards you hold onto for credit history value do not have annual fees.
Another big benefit of keeping your credit card accounts open is helping to keep your credit utilization score down. More credit — especially open, unused credit — is very beneficial.
The No. 1 factor to determine your credit score is payment history. Paying on time shows lenders that you are a reliable borrower. However, there’s another way to improve your score that doesn’t require years and years of on-time payments: a technique called micropayments.
Micropayments are exactly what they sound like, tiny payments toward your credit balance. The key difference is that you make micropayments frequently. Rather than waiting for the monthly statement to arrive, you make micropayments as often as possible.
Ideally, you’d make a micropayment as soon as you used your credit card to make a purchase. With online credit card payment systems, making credit micropayments is an easy habit to begin and maintain.
Micropayments make a difference because of something called credit utilization.
Credit utilization is the amount of credit available to you in relation to how much you use. Lenders like to see a credit utilization of 30% or less. For example, having a credit line of $1,000 while only carrying $300 or less at a time. Therefore, every time you make a micropayment, you are decreasing your credit utilization and making yourself a more attractive borrower.
Micropayments are perhaps the fastest way to boost your credit score.
Raise Your Credit Limit
There’s an easy and legal way for you to game the credit score system and instantly readjust your percentage of credit utilization: ask your lender to raise your credit limit.
While micropayments work to reduce your credit balance, raising your credit limit will have the same impact, plus it won’t cost you a penny.
Suppose you have a credit limit of $1,000 and a balance of $500. That gives you a credit utilization of 50%, a full 20% higher than borrowers and credit rating bureaus like to see. If you call your credit card company and get them to raise your credit limit to $1,500, suddenly your $500 balance only accounts for about 33% of your credit utilization, which is just 3% higher than the ideal target of 30%.
Be sure to control your impulses to use that increased credit availability. Also, be careful not to open too many accounts, which can have the opposite effect by reducing your credit score.
Mix Your Credit Types
If you only have loans, apply for a credit card. If you only have credit cards, apply for a loan.
Lenders like to see that you have success handling payments for multiple types of credit. The difference in their eyes is the type of credit payment.
With revolving credit (such as a credit card) you decide on the payment amount to make each month. With installment credit lines, the payment amount is fixed (like a car loan). Building up a broad credit mix will give credit reporting agencies reason to boost your FICO credit score.
Improving Your Credit Score to Buy a House
You have the power to improve your credit score quickly and with very little effort. Many of these ideas, such as checking your credit report, requesting a credit level increase, and opening new lines of credit, can be done today and won’t cost you any money.
Take action. You deserve to have the best credit score possible, and there’s no good reason to wait.
When you also know that you are ready to start shopping for your dream home, connect with a personal loan officer and check in with them often. They can be your guide to help you qualify for the right program to buy or refinance a house.