If you’re thinking about buying a home within the next two years, it’s time to start working on your credit. Lenders use credit scores as big indicators of whether borrowers are ready to handle a mortgage loan.
Your credit heavily weighs into the mortgage decision. If affects the interest rate you pay and the type of loan you can secure. If your credit scores are too low, you may not be able to get approved.
Getting serious about raising your credit scores are one of the best ways to prepare your finances for a mortgage loan. Here’s a step-by-step plan for improving your scores.
Pull Your Credit Report
Before you start improving your credit file, you need to know what you’re dealing with. Go to www.annualcreditreport.com and request your free credit reports. This website is sponsored by the three credit bureaus (Equifax, Experian and TransUnion) and allows consumers to pull their credit reports once a year for free. Don’t worry about paying extra for your credit scores, as you don’t need them right now.
Closely review every line of your credit report to ensure you’re familiar with the lenders, balances and payment histories of all of them.
It’s sometimes shocking to people that credit reports can contain errors, but they often do. Data is added to the credit report based on a person’s name, address, date of birth or social security number, creating lots of room for human error.
If you see accounts that aren’t yours, late payments when you weren’t late, or collection accounts you don’t recognize, you have a right to dispute them with the bureaus. Dispute inaccurate report information online at Experian, Equifax and TransUnion. The bureaus will investigate and, if the information is indeed inaccurate or doesn’t belong to you, they’ll remove it from your report.
Getting inaccurate information removed from your credit report can take 60 days, but it can increase your credit score dramatically.
If You Don’t Have a Credit Score, Open an Account
Some people assume if they have no credit, that’s a good thing. However, it’s not helpful when you’re trying to qualify for a mortgage. A long, positive credit history shows lenders you can manage debt, which makes you look less risky to them.
If you have no credit, open a credit card now. Charge a small amount (like a tank of gas or a dinner out) and pay it off before the due date every month. This move will start building your credit and assist you in getting approved for a mortgage.
Make Your Payments on Time
We can’t stress this enough. Payment history has the most impact on your credit score of anything. If you’re late on your car payment, credit cards or student loans, get current and stay current. Add the due dates to a calendar with a reminder or have the payments deducted automatically from your checking account. The sooner you start making your payments on time, the better your credit score will look to lenders.
Pay Down Your Debt
Another element that affects your credit score is your revolving debt load. If your credit cards are almost maxed out, your credit score will suffer even if you’re making on-time payments. Find some ways to pay down your debts, like:
- Cutting non-essential spending
- Getting a part-time side gig
- Having a yard sale
Aim to get your credit card balances as low as possible before you embark on your homebuying plan.
Avoid Closing Any Credit Cards
Your credit score looks at how long you’ve had credit and gives you points for a lengthy credit history. So, if you opened a credit card in high school or college, be sure to keep it open and use it occasionally. Using it once a quarter, even if you pay it off immediately, keeps that credit history factored into your scores.
Don’t Open Any Other Credit Lines
We said earlier that you need some credit lines to have a good credit score, which is true. But, you don’t need too many. If you open multiple credit cards too close together, it can have a negative impact on your credit score. If trying to get a mortgage is in your plans, protect your score by avoiding opening new credit cards or applying for any other credit lines.
Building and managing your credit history should be one of your top priorities if you’re planning to purchase a home. The sooner you begin, the higher you can get your score, which will be instrumental in qualifying for the best loan terms available.