A good credit score is the secret sauce for seizing the best interest rates and stress-free approval for loans. It is also a major determining factor in getting pre-approved for a home loan. Once you decide that you are serious about buying a home, it is time to order your credit report, sit down with it, and make a game plan on how to improve it. Though there is no quick fix, establishing good credit habits over time will improve your score. Don't know where to start?
Focus on the three categories that contribute to 80% of your score: payment history, credit use, and credit history. Addressing these three areas, we have broken down a good credit repair strategy into 5 practical tips that you can start doing today.
This may sound very basic, but it is a vital starting point. You may have bought everything with cash and been on time with all your bills, but without a credit history, it is difficult to get the best score. Your length of credit history accounts for 15% of your credit score, and the longer you have credit that you faithfully pay off, the better your numbers will be. Get a credit card and make regular payments on it to start creating a reliable credit history.
NEGOTIATE BAD DEBT OFF YOUR REPORT
Life happens. Sometimes we hit bad times and can't make payments on some bills or credit cards. Unfortunately, long after you have recovered financially, these blips in your payment history can negatively affect your report. However, the good news is that you can negotiate with your creditors to erase or amend your accounts on your report. You will be surprised how much you can accomplish by just asking them. If you are not current on any payments, make it our priority to pay them off. By offering to make good on old debts and apologizing for non-payments, many creditors will expunge negative reports of or mark a bill as "paid in full." The more you eliminate unpaid debt on your report, the better your score will be.
PAY YOUR BILLS ON TIME
Another very effective way to build your credit is to be on time with payments. With your payment history making up a staggering 35% of your FICO score, you want to be on top of your bills. After all, whoever is doing your loan wants to know one fundamental thing above all: will this person be able to handle the mortgage? If you regularly pay all utilities, loan payments, credit cards, and rent, this is a strong indication that you will do just fine with a 30-year mortgage.
DON'T OVERUSE CREDIT CARDS
Just because you have a $6,000 limit on your Visa doesn't mean that it is time to go on a $4,000 shopping spree at the Armani Exchange. Even if you earn well enough to cover these expenses every month, using too much of your credit card for purchases makes you look reckless. The golden rule of good credit is to only charge up to 30% of your credit card's maximum and to pay it off as soon as you can. If you feel as if 30% of your credit is a bit limiting and prefer not to use cash or debit, then make it a goal to raise your credit limit, which also improves your score.
DIVERSIFY YOUR CREDIT CONDUITS
Since your credit score improves each time you prove that you can pay things off and make payments regularly, it is not a bad idea to have some variety in your credit score. Taking out a small loan for a car or a business venture is wise provided that you make steady payments and are in a financial position to pay it off while not straining your margin. The more you prove yourself financially reliable, the higher your credit score rises.
Having a great credit score sets you up for a great financial future. Not only do you establish healthy spending habits while fixing your credit score, you also put yourself in a position to qualify for the best loans. By working on this solid foundation of good credit, you will benefit for years to come.
Are you ready to make an investment in property or purchase a home?