Are you getting ready to buy your own home? Great! Homeownership is one of the most important ways to build wealth over the long term. However, if your credit score is well below 700, you will have to pay a much higher interest rate. This will cost you tens of thousands of dollars in higher interest charges over the life of your loan. In most cases, it is essential to learn how to fix bad credit before applying for a home loan, at least if you want to qualify for a low interest rate and not be required to come up with a substantial down-payment. So, at least six months to a year before you apply for a mortgage, you should try these 9 tips below to raise your credit score as much as you can:
#1 Get Current on Your Payments
Nothing wrecks your credit score more than having delinquent payments of 30, 60 and 90 days. It is very important to have all of your late payment problems in the past by at least a year by the time you apply for your mortgage. Those late payments will still appear on your mortgage, but they will carry less negative weight with the lender. It's no secret that one of the quickest ways to fix credit scores is to make your payments on time each and every month. Buying a home with bad credit can be challenging so it makes sense to fix your credit scores prior to starting the loan process.
#2 Pay Much More than Minimums on Credit Cards
Even if you are making your minimum payments faithfully on your credit cards, this does not look good in the lender's eyes. If you can only make minimum payments on your debts, what happens if someone loses their job? How will you make your mortgage payment? Pay as much as you can on your credit cards to knock down those balances.
#3 Increase Your Available Credit
The credit scoring process by credit bureaus looks at the ratio of your debt to your total amount of credit. Add up all of your debts and compare it to your total credit lines. What is the ratio? If you are using well over 50% of your credit lines, you have problems. In an ideal world, you should be using less than 10% of your available credit lines if you want to maximize your credit scores. At least a year before applying for a mortgage, start working at getting your credit card balances as low as you can. You want that ratio of used credit to your total credit lines to be as low as possible. The reality is that mortgage loans for bad credit carry a higher interest rate and sometimes higher closing costs as well, so if you can avoid non-prime mortgages, you should.
#4 Leave Cards Open
One of the worst mistakes a lot of people make is to pay off a credit card and close it. You never want to do that! By closing a card, you just reduced your available credit by X thousands of dollars. This mistake could actually drop your credit score significantly. Imagine if you just paid off a $10,000 credit limit card and you close it. You just reduced your available credit by $10,000.
#5 Get a Copy of Your Credit Report and Correct Errors
Many credit reports contain errors, and some of those errors can hurt your FICO score. For example, there are cases of where a negative mark on a credit report can show up several times instead of once. Each time this negative mark shows up, it hurts your credit score. If you find any mistakes on your credit report, you should write to the three credit bureaus and contest the error and request that it be removed.
#6 Don't Move Debt Around from One Card to Another
Some consumers try to reduce their balances by moving their debt from one card to another. You can sometimes save on interest by doing this, but credit card companies caught onto this. They will charge you big fees for moving balances around regularly.
#7 Pay Off Your Car
If you still have a car loan on your credit report, you can really increase the score by paying down on the loan as much as you can. When you pay off the balance on your car loan there is a very significant chance it will improve your credit quickly.
#8 Open Trade-line Six Months in Advance
If you only have one credit card trade-line, you may need one or two more to qualify for some mortgages. However, you do not want to open up a bunch of new cards right when you are applying for a mortgage. If you do need to have a new trade-line to qualify for a mortgage, you should open it months in advance before you apply for a mortgage. Then, use it regularly to pay for all of your regular expenses but pay it off in full each month.
#9 Become an Authorized User on a Credit Card
If you have a relative who has a very high credit limit and good record paying on a credit card, you can ask them to add you as an authorized user on that account. This will raise your credit score, as long as the person continues to pay the bill regularly.
Getting a mortgage is quite easy these days even with average credit, as long as you have the documented income to support the mortgage payment. But if you want to maximize your chances of getting a loan and getting a low interest rate, you should try most of the above tips to raise your credit score. Having a higher credit score can save you big time in interest over the life of your loan.
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