If you’ve decided it’s time to buy a home, one of the next steps is to make sure your credit is up to par. Not only can a better credit score be the difference between qualifying and not qualifying for a mortgage, but it can also help you land a lower interest rate.
It used to be that a credit score in the mid-600s was enough to qualify for a home loan. Now, many lenders are looking for scores of 700 or better. If you’re not quite there yet, don’t panic. If you’re looking to buy a home, here are three ways to boost your credit score quickly.
There are resources online that you can use to get copies of your credit report. Once you’ve obtained a copy, it’s important to carefully inspect it.
Look for any mistakes. There could be negative items that are someone else’s, attributed to you because of mistaken identity. There could be incorrect balances or account statuses. Each of the three credit bureaus – Experian, TransUnion, and Equifax – has a process for correcting errors on your report. You can visit their websites to learn how.
You might also look for old entries on your report. A collection that was settled 10 years ago or a credit card account that’s been closed for a long time shouldn’t appear, as most negative entries expire after seven years. If you find outdated entries, you can approach each bureau about removing them, but it also might help to ask the creditor to update their information. That way, the new information can be reported to all the bureaus at once.
Almost a third of your overall credit score is affected by what’s known as your credit utilization ratio. It’s the percentage of your debt balances compared to your total available credit. For example, if you had $10,000 in credit limits and $1,000 in credit card debt, you’d have a utilization ratio of 10 percent. Most mortgage lenders want a ratio under 30 percent, but any decrease in your ratio will increase your credit score.
There are two ways to lower your ratio: Decrease your balances, and/or increase your limits. On an account with a $10,000 limit, a $500 balance is better than a $1,000 balance. If you have a $1,000 balance, your ratio would improve if you could raise your limit to $15,000.
The utilization ratio is the reason you shouldn’t close accounts after you’ve paid them off. Keeping accounts with zero balances keeps your total credit limit higher while not costing you anything. You might also consider asking someone with great credit to list you as an authorized user on an account of theirs that has a low utilization ratio.
Of course, the best way to maintain a good credit score is to pay your bills on time, all the time. You can’t always fix your payment history of days past, but you can make sure to pay all your bills on time going forward. Even a few months in a row without late or missing payments can bump your score a bit.
You might also think about paying bills early. Creditors that report to the bureaus once a month might do so before you’ve made your monthly payment. Paying early – or even paying twice a month – could help your score by lowering the balances that are being reported.
It’s rare to increase a credit score overnight, and there’s no way to know exactly how long it will take for a fix to reflect on any one person’s score. But removing mistakes or expired entries, lowering your utilization ratio, and paying all your bills on time can work to boost your credit score relatively quickly.
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