Before you even start looking for a home, you’ll want to be sure that you’re ready for that big financial commitment. One of the first steps to buy a house comes well before the search – it’s taking a look at your credit score.
If your score is too low, below around 580 to 600, your application for a home loan is likely to be declined. If it’s in the 600s and you’re approved, your interest will be higher, which also means those monthly payments will be higher, making a significant difference over the life of the loan. You could be paying thousands, or tens of thousands of dollars, more than you would with a good credit score. A score of at least 740 will usually get you the best interest rates.
Once you know your score, if it needs improving, there are a number of things you can do to boost it. Just keep in mind that it will take time, just like building a good reputation.
Thoroughly Check Your Credit Reports for Errors
There are three major credit reporting agencies, TransUnion, Experian, and Equifax. You’ll want to get yours from each one, with free reports available annually. You’re entitled to free copies at least once every 12 months under the Fair Credit Reporting Act. While a long list of companies will get them to you for a fee, AnnualCreditReport.com is legitimate and one of the most highly recommended.
Work On Paying Off Your Debt
Your credit utilization ratio plays a big part in your credit score. If you have $50,000 in credit available, for example, but have balances totally over half that, you’ll need to work on paying them off. Aim to reduce it to less than 20 percent, which would be no more than $10,000 in this case. You’re likely to see a dramatic rise in your score when you do.
Request Credit Limit Increases
If you can’t pay down your balances right away, consider requesting credit limit increases to improve your credit utilization ratio. If you have a card with a $5,000 limit and it’s maxed out, getting the limit doubled to $10,000 instantly cuts your utilization rate. Of course, it’s important not to use the additional credit or you’ll be defeating the purpose of getting it in the first place.
Make Extra Payments Each Month
It’s fine to use your credit cards to get miles for flights or points for hotels, etc. But if you’ll be applying for a mortgage anytime soon, you’ll want to be sure that’s not negatively impacting your score. Even if you’re paying the balance in full each month, if the payment is made just a day after it’s reported to the credit bureaus, it will cause a temporary dip in your score.
You can avoid this issue by making payments at least twice a month. Aim to make one just before the card’s statement closing date and another one after.
Become an Authorized User on Someone Else’s Account
If there is someone close to you, such as a parent, another family member, or friend with a high credit score who can add you as an authorized user to one of their credit cards (ideally one with a high limit and a low or zero balance), you can almost immediately increase your score. You don’t have to use the card; the account owner can hold on to it, so they don’t have to worry about you putting their credit at risk. There is some risk to you, however. If their circumstances change and they start missing payments or max out the card, it will hurt your credit score.