Your credit score is an important factor in securing a mortgage, but having a low credit score today doesn’t mean you will never be able to buy a home. Many people who have recovered from financial setbacks or bankruptcy have gone on to become homeowners in good standing. You can’t raise your credit score overnight, but learning the best ways to improve your credit is a good place to start, and it will help you reach you reach your goals more quickly.
Be wary of quick-fix schemes – Improving your credit takes time because it is a reflection of your credit history. FICO-the people behind the most commonly used credit scores-warn that quick-fix approaches to bringing up your credit score can often backfire. For example, having credit cards and loans will build up your score, but opening several lines of credit all at once could hurt your score rather than help it. Instead of looking for tricks, focus on the areas that matter most and your credit score will continue to rise.
Improve your payment history – According to FICO, your payment history accounts for 35% of your total credit score. It is the most important area to focus on when you want to improve your credit quickly. Here are a couple of tips:
- Avoid missed or late payments – Late payments on loans and credit cards have a big impact on your credit score, even if the payments were only a few days late. Fortunately, your payment history improves with each month that you make your payments on time. Keep up the timely payments and your past mistakes will have less effect on your score.
- Pay off collection accounts as soon as possible – When a delinquent account passes to a collection agency, paying it off won’t make it disappear. Collection accounts stay on your credit report for seven years, so you should pay them off as quickly as possible.
Manage what you owe – The amount you owe (your balances), accounts for 30% of your FICO credit score. It is the second-largest factor on your credit score, and there are many ways you can correct your financial behavior to improve your rating.
- Spend less than your limits – You may think lowering the limits on your credit cards is good for money management, but reduced limits could lower your credit score. Your credit report compares your balances to your amount of available credit and you will score more points if your average spending is well below your credit limit.
- Pay off balances instead of consolidating debt – While there can be some benefits to combining your debt into one low-rate loan or credit card, that strategy may actually lower your credit score. Instead, focus on paying each account on time without adding to the debt.
Establish credit wisely – Credit cards and installment loans (e.g. education or car loans) can help build your credit score, if you use them responsibly. But you shouldn’t apply for multiple credit cards or loans just to raise your credit score. Instead, focus on making timely payments on the accounts you do have. The longer you have a credit card, and use it responsibly, the better it will reflect on your credit score.
Check (and correct) your credit report – Stay on top of your credit status by periodically requesting a copy of your credit report. You can check your credit history directly through credit reporting agencies or with an authorized credit report service. Look for any errors, such as misreported late payments, and have them corrected.
Improving your credit takes time, but your credit score will rise more quickly if you go about fixing it the right way. Let the professionals at Embrace Home Loans answer your questions and help you on the way toward improving your credit and securing an affordable home loan.