Low interest rates, a strong economy and the turn of the seasons are all causing the real estate market to heat up. More homes on the market bring more competition to buy the inventory that is out there. And one way to stand apart from other buyers who are hoping to buy their first home is to improve your credit score.
“Preparing your finances is a must before the busy real estate season,” says Barrett Burns, president and CEO of credit score model developer, VantageScore Solutions. “Knowing your credit scores and making improvements is essential to getting the best loan at the best rates. This also makes you a more attractive home buyer, especially in a competitive market.”
With limited time, you may think there’s nothing you can do to improve your score. But that’s an incorrect assumption. While you can’t make dramatic jumps in just a couple months, there are several steps you can take that may influence your score to increase enough to get you prequalified for the loan you want.
Lenders will pull your scores from all three major credit bureaus (Equifax, Experian and TransUnion), so it’s wise to check your credit report from each of them each year to ensure they are all reporting your credit history accurately. You can get a free credit report from each of the bureaus every 12 months at AnnualCreditReport.com.
Once you have your reports in hand, you can take steps that may have a positive impact on your credit score.
Step 1: Check For Errors
A credit report gives a comprehensive list of your lines of credit and payment history. The first step is to review your credit report for errors and take steps to make corrections, including past and present names, loan amounts and credit cards in your name.
When checking your credit score, bear in mind that some differences in credit scores across bureaus is normal. But if one of the three credit scores is an extreme outlier, it could be worth doublechecking your credit report from that bureau to make sure it doesn’t reflect any questionable or erroneous activity.
The free Credit Score widget in FinLocker provides free credit monitoring and alerts to catch and repair any errors early.
Step 2: Don’t Miss A Payment
Lenders are interested in seeing how you manage credit, and the consistency of behavior counts. You should always pay at least the minimum amount due on bills on time every month. An easy way to ensure you don’t miss a payment is to sign up for automatic bill pay when available.
Step 3: Lower Credit Utilization Levels
Credit utilization is the ratio of a credit card balance to the credit limit. If your balance is $5,000 and your credit limit is $10,000, then your credit utilization for that credit card is 50%. Aim to get your credit utilization below 30%. If you have a higher ratio, start budgeting so you’ll have additional money set aside each month to pay down this debt, and stop adding to the debt with new charges.
Step 4: Don’t Close Old Credit Cards
If you have a credit card that is no longer used but was previously paid off on time each month, don’t close the account. Not only is this good for your credit utilization ratio, but it contributes to your credit history, which is another factor that impacts your credit score. A paid off credit card will also indicate to lenders that you’re a responsible candidate for a loan.
Step 5: Don’t Apply For New Credit
Avoid applying for any new credit, such as an auto loan or a new credit card account, between the time you get pre-qualified or pre-approved for a home loan and the time you will close on a home purchase. Lenders considering your loan application request your credit score from one or more of the credit bureaus. And these lender “inquiries” are recorded with one or more of the three national credit bureaus, which may lower your credit score by 10 to 20 points. The score decreases typically only last a few months, as long as you continue to make payments on time. But unless they’re absolutely necessary, try to avoid additional inquiries until you’ve closed on your home loan.
If you follow these five steps, you may see an increase in your score within a few months so you can get a loan and be an attractive buyer when it comes time to finance your home.
Keep in mind, the more you can put towards the down payment, the more instant equity you’ll have, and the lower your monthly payment will be. With a 20% down payment you’ll avoid paying private mortgage insurance (PMI), on top of your regular monthly mortgage payment.
Plus, if you’re able to put down more than a lender requires, a mortgage company may be willing to consider a lower credit score or higher debt-to-income ratio.
The road to a better credit score doesn’t have to be extremely long and shines a bright future for you ahead when you use your FinLocker regularly.