If you are trying to get a home loan or any other loan, your credit score plays big part in whether or not you qualify. Here are some steps you should take to improve your credit score to make way for a mortgage.
Why You Should Improve Your Credit Score
First of all, lenders use a process called underwriting, which evaluates your ability and willingness to repay your loan. They judge your ability to repay by looking at your income, stability of your earnings, and your past credit history. This helps determine if you can afford the loan payments. If you have made payments on time in the past and have a clean credit report to show for it, you will be judged as being trusted to make payments on time in the future. They use your credit score as a way of measuring all of these things.
Before trying to secure a loan, it’s best to obtain a copy of your credit report. View your credit score, and work diligently to repair a low score. You can obtain your credit report for free by visiting AnnualCreditReport.com. You are entitled to one credit report per year from each of the three credit reporting bureaus (Experian, Equifax, and TransUnion). Although the credit report is free, the credit score is not. You will have to pay a small fee to obtain your credit score.
Credit scores range from 300-850. According to Experian.com, a credit score above 700 usually suggests good credit management. Therefore, when lenders see a score above 700, they feel more confident that the terms of the loan will be fulfilled. Without a good credit history and score, you may not qualify for the loan.
How to Improve Your Credit Score for a Mortgage
So what do you do if your score isn’t as high as you’d like it to be? First, it’s important to note that improving your credit score takes time, and there is no such thing as a quick fix. By following these tips, over time you will see improvements in your credit score.
- Keep track of your credit usage. Try not to exceed 50% of your available credit.
- Try to keep your debt to income ratio less than 36% (click here to figure out your debt to income ratio).
- Pay your bills on time – If you don’t pay your bills on time, you will become delinquent and this can have a major impact on your credit score.
- Don’t miss payments – If you miss a payment, do your best to make the payment up and stay current. The longer you pay your bills on time, the better your credit score.
- Collection accounts – If an account goes into collections for nonpayment this will stay on your credit report for 7 years.
- Don’t open new credit cards – Only have credit cards that you absolutely need. Having too much credit can adversely affect your score.
- Beware of closing accounts – This too can adversely affect your credit as this lowers your total available credit and appears you are maxed out.
- Making ends meet – If you are having difficulty with making on time payments and need some help, you can contact your creditors directly, or you may want to contact a non-profit credit counseling office.
Once you have a solid credit report, then it’s time to think about a mortgage loan. As a result of these strategies, your overall finances will be in better shape.
For more information or to speak with a certified credit counselor, call 1-800-769-3571.