Homes are in short supply, which has made the local market very competitive. As such, it’s imperative that homebuyers, especially first-time homebuyers, do everything they can to improve their ability to get a loan. One of the biggest pieces of the puzzle is your credit score.
Your credit score can make or break your chances of being approved for a mortgage loan. And when you find a house you want, you need to be able to move fast in this market. Here are eight ways you can improve your credit score to have a better chance at getting approved quickly.
Pay Your Bills on Time
Sometimes things just happen that prevent us from paying a bill on time. Maybe it just kept slipping your mind, or you forgot to drop the check in the mailbox. But here’s the thing — lenders don’t care. Not paying your bills on time, or not paying them in full, shows a lack of financial discipline that’s a big red flag to lenders.
And by the way, on-time payments can account for nearly 40% of your FICO score. So, do yourself a favor and pay your bills on time and in full.
If You Can’t Pay on Time, Negotiate
If you can’t pay your bills on time, odds are you know well enough ahead of time. You don’t want to let them go delinquent, but you can sometimes negotiate with your bank or creditor to extend your loan period and reduce your Equated Monthly Installment (EMI).
It won’t come without a few scars and bruises (metaphorically speaking, of course), but it will make a good impression with your bank, and it may save you from incurring additional penalties.
Keep Your Credit Debt Within the Limits
Your debt-to-credit ratio, or credit utilization ratio, plays a big role in your credit score. Your debt-to-credit ratio and how much debt you carry together account for 30% of your FICO score. A good rule of thumb is to keep your outstanding, unsecured credit below 50% of your annual salary. Also, keep your credit card balances within half of the allowed limit. Using revolving credit at greater than 30% of the limit starts to negatively impact your credit profile.
If You Use Credit Cards, Use Two
Tread lightly here, folks. The only thing worse than having one maxed out credit card is having two. But there are some benefits to spending with two credit cards. Specifically, it can help you keep your usage percentage under control.
Let’s say you have a credit card with a $20,000 limit. You make a number of purchases to the tune of $15,000. That’s 75% of your credit limit, which is higher than you want (see tip #2 above). However, if you have two credit cards each with a $20,000 limit and you make those same purchases, but put $7,5000 on each card, now each card has about 37% of the limit.
Be careful, be smart, and this can work to your advantage.
Maintain a Healthy Mix of Credit
You’ve likely heard it before; there is good debt and bad debt. While all debt can keep you up at night, there is a distinct difference. Essentially, if your debt increases your net worth or has future value, then it’s good debt.
If your debt doesn’t do that, and you don’t have the cash to pay for it, then it’s bad.
Home loans, business loans, and even student loans are considered good debt. Personal loans and credit cards are the bad stuff. Having a good blend means that when you invest in a home loan, you’ll be building an asset.
Pay off Your High-interest Loans and Small Debts First
If we could all wave a magic wand (or a winning Powerball ticket) and wipe out all our debt, we would without question. A more realistic solution is to pay off your debts the old-fashioned way. A good strategy is to start with the high-interest loans and the small debts.
Bad debt, like credit cards, usually have high interest rates and aren’t creating assets. They’re just draining your dough, so get rid of them. Accept the fact that you’ll be paying on your student loans for years and focus on the toxic debt first. And remember, home loan interest rates are still at near historic lows and they build an asset, so don’t be afraid of that debt.
Last, understanding the hierarchy in debt management promotes fiscal responsibility. Consider the following:
- Pay off the smallest balances first (get rid of payments)
- If balances are similar, then pay off the account with the highest payment threshold (doing so creates more monthly cash flow)
- If both balances and payments are similar, then pay off accounts with the highest interest rate
Regularly Check Your Credit Reports
Credit reports used to cost money, albeit a small sum. Now, you are entitled to a free credit report once every 12 months. Take advantage of this! If you haven’t run a credit report in a while, go to annualcreditreport.com and get yours going. All you’ll need is your name, address, social security number, and date of birth.
Once you have the report, scan it for any mistakes. It’s not common, but there have been instances where creditors report inaccurate information to the credit bureaus. Do your due diligence.
Regularly Monitor Any Joint Accounts or Co-signed Loans
Be cautious when co-signing a loan or opening a joint credit account with anyone, especially someone outside of your close family. Closely monitor the statements on a regular basis for any issues, and have them sorted out immediately. You don’t want to be held accountable for someone else’s bad financial decisions.
*Not intended as credit counseling, accounting or investment advice. Contact your financial representative for more information.