If you're doing your due diligence when it comes to home buying, you've likely come across the importance of a healthy credit score. While it is still possible to secure a home loan with a low credit score, you'll likely be faced with fairly high interest rates.
When it comes to buying a home, you need to be smart with your money. The best way to go into the buying process is with a strong credit score. That way, you can secure more competitive terms and the money you save can be put towards another expense or be added to your rainy day fund.
Wondering how to improve your FICO score so that you can buy a house? Here are three tips to help you get started!
Credit Score Breakdown
Since most lenders use FICO scores to determine credit risk, that's the model we'll go off of. As a rule, the FICO credit score breaks down as follows:
- 499 or less: very poor
- 500-579: poor
- 580-669: fair
- 670-739: good
- 740-799: very good
- 800+: fantastic
Don't be discouraged if you're currently in the lower range. With a few smart choices and a little bit of time, you'll be well on your way to a fantastic score that lenders are eager to work with.
Tip 1: Pay Bills on Time
Did you know that payment history makes up 35 percent of your total credit score, making it the single most important factor when it comes to determining your rating? That means that a crucial step in improving your credit score is making sure you pay all of your bills on time and consistently.
Since bills come at different times and can be difficult to keep track of, make sure you have a system in place that helps you stay organized. Log when you paid the bill, how much you paid, and the balance owed. By seeing all of your bills laid out before you, you can better plan your finances.
Tip 2: Don't Max Out Credit Cards
The next biggest factor in determining your credit score? Credit utilization, which is the percentage of available credit that you have borrowed, accounts for 30 percent of your score.
What's the takeaway here? Don't max out your credit cards. Maxed out cards, or ones that are very close to their limit, show a lack of responsible money management, as least as seen by FICO. Therefore, it's best to maintain low credit card balances. This is easier said than done, of course. Just be mindful of what you're spending money on. If it isn't vital, skip the purchase. You can always go back and buy something once you've built up your score and have more money saved.
Tip 3: Apply for New Accounts Only as Needed—And Don't Close Unused Cards
While it may be tempting to show you qualify for several cards, doing so won't improve your credit score. When you apply for a new card, a hard inquiry shows on your report, which can actually lower your credit score. Multiple inquires can severely damage your rating, so be sure to do your research before opening any new accounts. Plus, the more cards that a person has, the more they are tempted to spend. Only apply for what you need and be sure to carefully track your spending so that you can meet all monthly installments on time.
Many people feel the need to close unused cards, but that can hurt your rating as well. Assuming you aren't spending money on annual fees for the card, an open account may decrease your credit utilization ratio.
Additionally, there may come a time when you need some extra help. Rather than having to apply for a brand new card, you have a backup one ready to go, which means one less hard inquiry on your credit report.
Bonus Tip: Stay in the Know
There have been many instances of stolen identities, which can be detrimental to a credit score. By running periodical background checks on yourself, you can see if any new information has popped up that isn't accurate. For instance, maybe a new phone number or email address linked to you comes up, or a new address. These can all be early indications that someone is in the beginning stages of using your information.
Check out this people finder service that can help you ensure your information is correct. A background report on yourself can be completed in a matter of minutes.
It can take a while to build up your credit score, especially if you're starting in a low range. By conducting background checks on yourself, you're helping protect your hard-earned rating, which will prove beneficial when it comes time to apply for a home loan.
A Competitive Mortgage Offer Awaits You
So, is it hard to improve your credit score? It's actually easier than most people think! By simply being consistent with payments and being more aware of how you spend your money, you can start to increase your score over time.
Once you've built up your score, let Lendgo help you explore your mortgage options!