We all dream of owning a new home in a new community for most of our lives. The increase in interest rates and decrease in available loan programs has made it more difficult to qualify for a mortgage loan than it has been in the past. The number of variables that determine an individual score make it impossible to say that one particular action will increase a credit score by a certain number of points. Below are some tips that will help you maintain your good credit rating, or help improve your current credit score, so that you will have more options in securing your desired real estate mortgage loan.
1. Monitor your credit report often.
Note that it is acceptable and reasonable to request and verify your own credit report. This will not affect your score, given that you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers. Look for errors that could be affecting your score such as accounts that do not belong to you, payments reported as late that were actually paid on time, satisfied debts that are shown as outstanding, or old debts that should have been removed. (Negative account records should be deleted after seven years, with the exception of bankruptcies, which can stay for as long as 10 years). After mending errors, the fastest means to a better rating is paying down balances on credit cards.
2. Pay down high balances on credit cards.
Contrary to what many credit advisors say, paying off credit cards each month is not always the best solution to improve your credit rating. Make your credit card payments, but keep the rolling balance between 25-35% of the credit limit. Paying the balance in full may actually lower your credit score. Accounts with zero balances do not compute significantly in your total score. Any balance keeps the card active so it calculates into your credit score. Even out your credit card usage by transferring the balance from a card that is near its limit to other lower balance cards.
3. Have 3-4 open credit card accounts.
Most likely, you have been advised to cut up your credit cards and close your accounts. Following this advice degrades many credit scores. Have credit cards, but manage them responsibly. In general, making timely payments on credit cards and installment loans will raise your score. A consumer with no credit cards, for example, tends to be a higher risk than someone who has managed credit cards responsibly. Closing unused accounts without paying down your debt worsens your utilization ratio, the amount of your total debt divided by your total available credit. If you close accounts, your utilization ratio will make it appear that you are closer to maxing out your accounts. If you find that you must close some accounts, leave the oldest ones open. The length of your credit history is an important factor in your score. If you close the oldest account and leave open the more recent ones, you appear to be a much newer borrower.
4. Don't make late payments, and if you must be late, communicate with your lenders in advance.
If you want to have a really good record with creditors, make your payments on time. If you are having trouble making ends meet, contact your creditors and let them know your situation. Some lenders do not report payments made 30 days past due, but they all report 60 days past due. Even if you've paid your bills late in the past, you can improve your credit score by paying every bill on time from now on. This will not improve your score immediately, but if you can make payments before they are due, your score will get better over time.
5. Avoid obtaining new credit accounts.
Apply for and open new credit accounts only as needed. Do not open new accounts just to increase your available credit – it probably will not raise your score. This approach could actually backfire and lower your credit score. Opening too many new accounts rapidly will lower the average age of your accounts. Younger account age has a dramatic effect on your score, especially if you do not have a large number of other credit accounts. Opening new accounts within a short period of time also makes you look risky to a lender.
By taking necessary steps to maintain your good credit rating, or to improve a lower credit score, you will benefit in your search for a new home loan. Most lenders offer a tiered finance rate system, which means you will secure a lower interest rate with better credit qualifications. This can end up saving you thousands of dollars over time and will decrease the amount of cash required for a down payment. By following these strategies, the likelihood of obtaining your desired mortgage loan terms will increase, and before long you will be in your new home!