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Improve Your Credit Score Before Buying A Home
By: Roselind Hejl
Several months before you begin to look for a home, you should take steps to get
"credit approved" for your loan. Start by making a list of all your existing
loans and credit cards, with the company names, account numbers and monthly
payment amounts. This will help you to analyze the information shown on your
credit report. Include all closed loans and credit cards if these records are
available.
1) Get a Financial Check-Up
Make an appointment with a good mortgage lender, and request a full credit
approval. As a part of the approval process, your credit report will be ordered.
It will include data from the three main credit reporting agencies - Equifax,
Experian, and Trans Union. The report will show three credit scores - one from
each agency. The interest rate and type of loan available to you is related to
your credit score.
The assistance of a mortgage professional to help you to understand your credit
report and offer suggestions on how to improve your score is invaluable. For the
average person, interpreting a credit report and dealing with errors is a
daunting task. Credit reports are filled with frustrating jargon and codes. They
are not written for the general public to read. Even more intimidating is the
task of communicating with credit agencies to dispute or correct information.
2) Correct Mistakes
Credit reporting agencies often have mistakes in their data. The information in
your credit file is input by computers. A computer weighs your data using
complicated mathematical formulas to arrive at a credit score.
Nearly everyone has paid bills late for one reason or another. Perhaps a bill
was sent to a wrong address, or you have had a dispute with a vendor. It is
likely that you have some issues on your report that should be disputed or
corrected. Each of the websites of the three main agencies has a dispute
resolution page. Feel free to use it.
3) Deal With Real Credit Issues
You may have had serious credit problems at some point in the past. Reviewing
this may be emotionally draining, and will bring up the underlying situation
that caused the credit problems. Get advice on how long the issues will remain
on your report, and how to re- build your credit worthiness.
Or, you may have a persistent habit of overspending. In this case, you should
talk with a financial advisor or personal counselor to help you work out of
debt, and establish better habits. The National Foundation for Credit Counseling
offers low cost assistance for serious credit problems. If you place yourself
under their supervision to handle your debts, you will not be able to obtain new
credit during the work-out period - which may be years. Before doing that, ask a
mortgage lender or financial advisor if there is a way to redeem your credit
without their supervision.
4) Check Your Credit File
A law, passed in 2005, requires the three main credit agencies to provide a free
credit file disclosure each year. It has been suggested that you could order a
file from the first agency in January, one from the second in May and one from
the third in September. The central site where your file can be ordered is
annual credit report dot com. The purpose of this law seems to be to help people
find out if they are a victim of identity theft. This enables you to monitor
your file for any new credit that did not come from you.
If you take advantage of the free credit file reports, you should check them for
mistakes. Use the credit report that you reviewed with your mortgage lender to
compare with the data in your credit file. Keep in mind that the free credit
file disclosure is not a credit report. It does not include a credit score.
5) Understand Credit Scores
Less than 620 - Poor
620-680 - Average - You may need to put more cash down on your loan.
680-720 - Good
720 - 800 - Excellent
800-850 - Seldom seen
6) Play by the Rules
The information in your credit file is scored by these factors:
35% - Payment history - Paying bills on time is very important. Today many
people use auto draft or pre-written checks through online banking to pay bills.
These help to prevent late payments. If you want a good credit score, do not pay
late!
30% - The relationship between your available credit versus how much you have
used is an important factor in your score. If you are over 50% drawn against
your available credit, this will count against you. For this reason, it helps to
keep old credit card accounts open, even though you do not use them. They build
up the total amount of credit available to you, relative to what you have
charged.
15% - The length of credit history on each loan has an effect on your score. A
more seasoned loan is scored higher. For this reason it is not a good idea to
open credit cards offering low initial rates, then close them after a few months
and open new credit cards.
10% - The number of inquiries made on your credit report affects your score.
Each time you open a credit card or new loan, your credit information is pulled.
Keep these to a minimum. A recent law has made it possible for people shopping
for homes or autos to have multiple inquiries, from the same industry (mortgage
or auto), done over a 30 day period without penalty. However, to be on the safe
side, do not allow your credit report to be pulled unless absolutely necessary.
10% - The types of credit used may hurt your score. Loans from finance
companies, signature loans, furniture loans and some retail store loans are
considered a poor judgment because of their high rates, and may count against
you.
7) Improve Your Credit Score
It is easy and necessary to borrow money. We customarily make everyday purchases
using credit cards, and set up loans for homes, cars and other purchases. Your
credit score is especially important in the purchase of your home. It will
affect the type of loan available, down payment required, and interest rate
charged. A low score can cost you thousands of dollars in additional interest
over the years. Even insurance companies factor your credit score into their
decisions. More than ever, you need a good credit score, or you will pay the
price.
Finance providers, rental agencies, car dealers, insurance companies and credit
card companies are not going to help you improve your credit score. In fact,
they have an economic interest in charging you a higher rate. It is up to you to
be proactive about understanding and improving your own credit score. A good
time to start is when you begin the mortgage approval process for a home
purchase. It is a good habit to have.
About the Author:
Roselind Hejl is a Realtor with Coldwell Banker United in Austin, Texas. Her
website - http://www.weloveaustin.com - offers homes for sale, market trends,
buyer and seller guides. Let Roselind help you make your move to Austin. |
