5 Ways to Improve Your Credit Score Before Buying a Home
By Lisa Fant
When you finally decide it’s time to buy a home, your finances should be one of your first considerations. But before diving into your home search, you may want to consider double checking your credit score. While this is general financial advice, it’s always a best practice to talk to an expert with knowledge of your personal financial situation.
Your credit score determines which financial options you have for buying a home—and unless you’re planning to pay cash, being on top of your credit is vital in securing the best interest rate and terms you’ll qualify for. Checking your score and making improvements as soon as possible will not only give you the ease of mind but will help determine what you can financially manage. NJ Realtors® affordability calculator can also help you evaluate how much house you can afford in addition to the down and monthly payments you’d need to purchase a home.
Keep in mind there is a significant difference between your credit report and credit score. A credit report is a compilation of information including your lines of credit, payment history, active and closed accounts, and more. All in all, your credit report is a comprehensive statement of all credit history and how you’ve handled your credit accounts.
Credit scores typically range from 300 to 850. Your credit score is calculated based on the information on your credit report. According to Experian, mortgage lenders typically require a credit score of 620 or higher.
Once you know where your credit lies, you’ll be ready to fix any issues and build credit to get the best rate.
Dispute Credit Report Issues
It’s very well possible you’re unaware of mistakes on your credit report. A duplicate account or closed accounts reported as open can lower your credit score. Obtain your credit report and carefully review all accounts. If there are any discrepancies, submit a dispute with the credit bureau. Eliminating common errors is a quick fix to improve your overall score.
Avoid Late Payments
On-time payments are one of, if not the biggest factors affecting your credit score. Your credit report reflects if and how often you miss a payment; going from paying a credit card bill late each month to paying the bill on time can quickly show improvement to your report. If a large monthly payment is keeping you from being able to pay on time, consider paying down the balance throughout the month so the payment is complete before the due date hits.
Talk to your Mortgage Lender
Lenders can give you the best course of action to improve your credit score quickly. A rapid rescore is a tool lenders can use to quickly repair credit issues that would normally take much longer. It can take weeks or even months to have credit errors fixed by credit bureaus. Rapid rescoring is not a replacement for fixing issues with the credit bureaus and will not repair longstanding negative items on your reports such as missed payments, collections, or bankruptcy—it is, however, a “quick fix” that will correct and update credit info. With a rapid rescore, your credit score can increase by a few to a hundred points in just a few days.
Limit Hard Inquiries
Some experts recommend opening a new credit account to help raise your credit score. When you open a new account, there’s an opportunity to reduce your credit utilization since your credit line increases with additional accounts. While a new account may be a good tool for credit improvement in some instances, if you’re looking to buy a home soon, it may not be the time for additional accounts. Your credit report also reflects hard inquiries—a credit check that shows when you apply for a credit card or loan. Several hard inquiries can negatively impact your credit report and when you’re looking for a loan as significant as a mortgage, you may want to think carefully about risking your score.
Avoid Multiple Closed Accounts
Another important factor in your credit report is the age of the credit you’ve obtained. The length of your credit history, with accounts in good standing, shows lenders you’ve successfully obtained and managed accounts well. The longer your account reflects great credit history, the more likely you are to be approved for additional credit and maintain a high credit score. Even if the credit is paid down to zero, letting the account remain open shows positive credit history.
Beginning the homebuying process is an exciting but overwhelming time for many buyers. Preparing your credit and knowing how to maintain it can alleviate stress and help you make the best possible financial decision.
