Improve credit score before buying house

6 Steps to Improve Your Credit Score Before Buying a House

There are a lot of steps involved in purchasing a new home. If you are like the 70% or more of home buyers, you’ll be purchasing all or part of your home using a mortgage. (Historically, financed purchases were closer to 80-90% of property sales. In 2021, the number of cash buyers greatly increased to around 30% of all transactions, according to Bloomberg.)

When you decide that you’d like to buy a new home, before you start looking at properties, you’ve got to make sure that you are qualified to purchase by taking important steps and talking with a lender. But, before you talk with a lender, there are several things you can do on your own to prepare for applying for a mortgage.

One of the first things lenders check when you apply for a mortgage is your credit score. Most buyers who get pre-approved for a mortgage have a credit score of 640 or higher, but some loan programs approve buyers with credit scores in the 500s. 

Having a credit score at or above 640 will give you the best loan opportunities including a lower interest rate and better overall terms. If you’re wondering how to fix your credit and make yourself more appealing to lenders, there are several ways to improve and repair your credit over time. It’s best to work on repairing and improving your credit before you start looking to purchase a home, so that when you need loan approval, your score is already in a good place.

Rather than only looking for ways to improve your score, you may actually be in need of fixing something that’s broken. The credit system is far from perfect, and because of it, many people have lower credit scores than they should have. Sometimes, fixing your credit report can be extremely helpful by itself.

Our guide takes you through steps and options for fixing your credit. We explain ways to improve your credit score and how to remove negative incidents and errors from your credit report. Below are 6 steps you can take to improve a bad credit score.

Do-It-Yourself Credit Repair
While it may seem overwhelming to embark on the credit repair process, you don’t have to hire a professional to fix your credit for you. The truth is, there is nothing a credit repair company can do to improve your credit that you can’t do for yourself. You can save money and the hassle of finding a reputable company and repair your credit yourself by:

  1. Learning what lowers your credit score – Learn what can negatively affect your credit score so you steer clear of mistakes in the future.
  2. Not being discouraged by setbacks – Sometimes, your credit score may drop unexpectedly as you go through credit repair. This could happen if you’ve paid off a debt and then closed an account, which can affect the credit utilization ratio of your remaining debt as it relates to your total available credit limit. Continue adding positive information to your credit report and your credit score will improve over time.
  3. Getting consumer credit counseling – If your debts are overwhelming, creditors aren’t willing to work with you, and you can’t seem to come up with a payment plan on your own, consumer credit counseling is an option for getting back on track. Choose a non-profit counseling agency that’s a member of the National Foundation for Credit Counseling or the Financial Counseling Association of America

How long will it take to fix my credit?
Improving your credit score is not an overnight process, it takes time and diligence on your part. On average it can take anywhere from three to six months for an inaccurate item to be removed from your credit report following a dispute. The length of time required to improve a low credit score largely depends on your particular situation, credit history, and what you do moving forward.

6 Steps to Improve a Low Credit Score

Check credit score and reports

#1  Check your credit reports and credit score

It’s hard to know what to work on without first knowing your current score and the details of your credit reports. A significant part of fixing your credit may involve repairing errors and omissions on your reports. That’s why it’s important to view your credit reports often—to make sure they’re accurate and that there are no fraudulent activities.

How to Get a Free Credit Report

You’ll need to start by getting a credit report to determine what exactly needs fixing. Each of the three major credit bureaus is required by law to provide you one free credit report per year, if you request it. If you space them out, you can get a free credit report every four months. Most creditors report to all three, but not all, so it’s worth checking the information on all three of these reports. 

Request your credit report from the Annual Credit Report Request Service online or via phone at 1-877-322-8228.

On your report, you’ll see your credit history, including any credit cards, loans, accounts that were sent to collection agencies and legal actions like foreclosures or bankruptcies. Because you get three free reports every year, it’s unlikely you’ll need additional copies, but you can purchase them directly from the credit bureaus if you need to.

You can check your credit score for free through credit scoring websites or some credit card providers. Checking your own score only requires a soft credit inquiry, which doesn’t damage your score. It’s common to check your score once per month.

While the score you check through your credit card or services like Credit Karma do give you a great idea of your general credit score, they are typically a little higher than the FICO scores that a lender will use. If you want to see where you stand on those so you know exactly what mortgage lenders will see, you’ll have to purchase a comprehensive FICO report. You can do that at myFICO.com

Review and dispute credit errors

#2  Review and Dispute Any Errors on Your Credit Reports

Once you have your credit reports, read through them completely. If you have a long credit history, your credit reports might be several pages long. It’s a lot to digest, especially if you’re checking your credit report for the first time. Take your time and review your credit report over several days if you need to.

Each time you open one of your credit reports, you should review it closely for errors. In many cases, these errors can be significant. As many as 5 percent of all credit reports may contain errors serious enough to affect their credit scores. 

When reviewing your credit report for errors, be sure to look for:

  • Incorrect personal information (misspellings, wrong addresses)
  • Accounts that don’t belong to you
  • Missing accounts that should be listed on your report
  • Incorrect public records (e.g., bankruptcies, foreclosures)
  • Accounts that aren’t accurate (they say they’re open when they’re actually closed)
  • Accounts listed as “closed by grantor” (meaning the lender closed the account on you)
  • Duplicate accounts
  • Data management errors
  • Delinquencies or derogatory marks (A derogatory mark is a negative item on your credit report that can potentially be removed, or you can build positive credit activity to overcome it.)
  • Fraudulent activity
  • Incorrect inquiries

Any of these errors could impact your credit—and whether or not a lender will approve you for a loan. If you do find an error on your report, you should check to see if the error appears on the two other reports produced by the major credit bureaus.

By fixing simple errors, many people have seen an improvement in their credit standing in a relatively short period of time. Taking an active approach in managing your credit and fixing errors may produce much better results than sitting back and waiting for your credit score to improve.

Dispute Credit Report Errors

If you’ve found mistakes on any of your credit reports, it’s time to challenge them. Luckily, the bureaus are legally obligated to try and resolve mistakes. Report your errors directly to the credit bureau where you received your report. You’ll need to provide documentation, such as proof of your identity, account information and any documentation that proves the error is false, such as court documents or credit card closing statements.

If you’re disputing several items on your credit report, only put one dispute in each letter and space out your disputes. The credit bureaus could become suspicious of too many disputes and consider them frivolous.

You should also contact the lender or creditor that issued the account to let them know of your dispute and the inaccuracy. Oftentimes the lender can correct the information on their end, which should update your reports with the three main credit bureaus. In most cases, you should hear a response to your dispute within 30 to 45 days.

What Happens After a Dispute

If the dispute is successful and your credit report is updated, the bureau will make the change, alert the other credit bureaus, and send you an updated copy of your credit report.

On the other hand, if the item isn’t removed from your credit report, your report will be updated to show that you’ve disputed the information, and you’ll be given the opportunity to add a personal statement to your credit report.

Personal statements don’t affect your credit score, but give additional insight into your dispute when a business manually reviews your credit report.

Pay off outstanding debt

#3  Pay Off Outstanding Debt

One of the best ways to increase your credit score is to identify any outstanding debt you owe and make payments on that debt until it’s paid in full. This is helpful for a couple of reasons. First, if your overall debt responsibilities go down, then you have room to take more on, which makes you less risky in lenders’ eyes.

Second, it improves your credit utilization ratio or how much you spend compared to your total credit limit. Lenders look at this ratio to determine whether you’re a risky or safe borrower. The less you rely on your credit, the better.

To get your credit utilization, simply divide how much you owe on your card by how much spending power you have. For example, if you typically charge $2,000 per month on your credit card and divide that by your total credit limit of $10,000, your credit utilization ratio is 20%.

If you plan to repay loan debt, it’s important to note that you might see a temporary dip in your credit score. But this will improve your credit score in the long term, according to Experian.

Tackle Past Due Accounts

Your payment history impacts your credit score more than any other factor; it’s 30% or more of your score. Since payment history is such a large part of your credit score, having several past due accounts on your credit report will significantly hurt your score. Taking care of these is crucial to credit repair. Your goal is to have all your past due accounts reported as “current” or “paid.”

Loan Balances and Your Credit Score

Your loan balances also affect your credit score in a similar way. The credit score calculation compares your loan current loan balance to the original loan amount. The closer your loan balances are to the original amount you borrowed, the more it hurts your credit score. Focus first on paying down credit card balances because they have a greater impact on your credit score.

Past Due Accounts vs. High Balances

It’s important to prioritize where you spend your money each month to pay down your credit. Focus first on accounts that are in danger of becoming past due. Until a payment is 30 days past due, it isn’t considered late by the credit bureaus.

Get as many of these accounts current as possible, preferably all of them. Then, work on bringing down your credit card balances. Third are those accounts that have already been charged-off or sent to a collection agency.

Having maxed out credit cards costs precious credit score points (not to mention costly over-the-limit fees). Bring maxed out credit cards below the credit limit, then continue working to pay the balances off completely. Your credit score will respond more favorably to credit card balances that are less than 30% of the available credit, below 10% is ideal.

When do collection agencies get involved?

If an account has a past-due balance of more than 30 days, your creditor may turn your account over to a collection department or agency to seek the funds directly from you. When an account is sold to a collection agency, the account can be noted on your credit report—often having an enormous negative impact on your credit score. That’s why it is very important to pay down past due accounts first.

Collection agencies work to collect funds on amounts due for credit cards, personal loans, auto loans and mortgages. Collection entries should fall off of your report after seven years. If the collection information is incorrect—just like any other error—you can file a dispute.

What is a charge-off?

When payments are 180 days (or six months) past due, your credit card will become “charged off”—meaning you no longer have the option to make regular minimum payments. Your creditor considers the debt as a loss in their own records and cancels your account, and you’ll only be able to pay the balance in full. You may be charged a late fee for each additional month that passes.

Being charged off greatly damages your creditworthiness. Your lender can even increase your interest rate to the penalty rate, which is often the highest rate possible. In addition, your creditor may assign the account to a collection agency. If you can’t afford to pay the amount in full, talk with your lender about payment options. If an account goes to charge-off status, this derogatory mark will remain on your report for seven years.

What is a pay-for-delete?

A pay-for-delete is an agreement between a consumer and a collection agency to remove a collection account from the consumer’s credit report—with an understanding that they will pay the full amount or a lesser agreed-upon amount. You can send a pay-for-delete letter to your creditor asking them to remove the charged-off account from your credit report in exchange for paying the past-due balance.

Pay bills on time

#4  Pay Bills On Time

Payment history is the biggest of all the factors that affect your credit score and accounts for up to 35% of your score. A large part of what a lender wants to see when they evaluate your credit is how reliably you can pay your bills. This includes all bills, not just auto loans or mortgages – utility bills and cell phone bills matter, too.

While it may feel like a challenge to pay all of your bills on time, there’s a simple hack to getting this right: autopay. You may want to save at least one month’s payment for all bills in your bank account that the autopay is setup for. That way, you always can pay a bill when autopay is drafted and then you use your next paycheck to replenish the reserve funds. If you have bills that don’t permit autopay—like one-off medical bills—pay them as soon as you get them. If you can’t, contact the office and work out a payment plan (on autopay).

Some credit card companies allow you to request a change in due dates. You can utilize this when creating your budget and accounting for when you will receive future paychecks. 

Another tip is to use your credit cards as if they were debit cards. Meaning, if you don’t have the money in the bank, don’t put the purchase on your credit card. Being able to fully pay off your credit card at any time is a great way to keep your balances paid off on time.

If you have some accounts that already have late payments, salvage what you can. Don’t sacrifice accounts that are in good standing for accounts that are not. Continue making timely payments on all your current accounts.

Don't apply for too much credit

#5  Don’t Apply For Too Much Credit

Usually, you should resist the urge to apply for more credit cards as you try to build your credit, because this puts a hard inquiry on your credit report. Too many hard inquiries can negatively affect your credit score. (When you’re under contract to purchase a home, don’t open any new credit accounts or make large purchases!)

Apply for new credit sparingly. If you’re trying to build up a thin credit file, you could add a new credit card, secured credit card or a credit-builder loan. Keep in mind you want six or more months to elapse between opening a new account and applying for a mortgage, so time applications wisely.

However, if your credit score is low because you do not have a lot of credit history, opening a few new lines of credit can be beneficial. Past delinquencies can keep you from getting approved for a major credit card, so limit your credit card applications to one, at the most two, until your credit score improves.

This will keep your credit inquiries low. Credit inquiries are added to your credit report each time you make a new application for credit; too many of them hurt your credit score and your ability to get approved.

If you get denied for a major credit card, consider getting a secured credit card, which requires you to make a security deposit to get a credit limit. Certain subprime credit cards are geared toward helping customers who wish to rebuild their credit; however, make sure you choose an offer from a reputable lender and compare all fees and interest rates before applying.

Credit card companies give each borrower a credit limit—denoting the maximum amount that can be spent before paying off at least some of the balance. Depending on the credit card and your creditworthiness, your credit limit might be a few hundred or a few thousand dollars. If you ask your creditor to increase your credit limit—and they grant it—it could improve your credit score, and give you a buffer before you need to pay on your balance.

Keep credit cards open

#6  Keep credit cards open

Be careful about closing credit cards. Rarely does closing a credit card help your credit score. In fact, closing a credit card is more likely to hurt your credit score, especially when the account has a balance. By keeping them open, you can establish a long credit history, which makes up 15% of your credit score.

Closing a card reduces the amount of available credit you have, which can send your credit utilization up and ding your score. Make a charge occasionally and pay it off promptly; that keeps the issuer from closing your account for inactivity.

As long as you can avoid temptation to spend on a credit card you no longer want, it’s better to keep it open and occasionally use it for small purchases to keep it active. However, if you’ve not overcome bad habits like maxing out credit cards and not paying on time, closing them may be better in the long run.

Being Credit-Ready When Buying a Home

Tips for maintaining healthy credit

Once you’ve had a chance to fix your credit, there are several actions you can take to maintain your healthy credit. By keeping your credit status strong, you’ll have more opportunities for low interest rates, and loan and credit card approvals.

  • Limit the number of hard inquiries: Soft inquiries don’t impact your credit, like when you check on your own credit score. Hard inquiries can affect your score—and occur when you apply for a loan or new credit card. Too many hard inquiries in a short period of time, such as a couple of months, can make you seem riskier and, therefore, negatively impact your score.
  • Set up auto-payments: Whether you’re paying the full balance or making a minimum payment, make sure your payments are on time. Log in online to your credit card, loan and utility accounts to set up automatic payments. This ensures you pay on time and gives you one less thing to worry about.
  • Keep old accounts open: If you don’t use a certain credit card very often but you’ve had the account open for a while, don’t close it. Older accounts show that you’ve maintained a healthy payment history with creditors—making you appear more creditworthy.
  • Aim for a mix: Maintaining a mix of different types of credit can give your score a boost, such as paying on a car loan, credit card and mortgage all at once. Just be sure you can make timely payments before opening new accounts or borrowing additional money.
  • Monitor your credit report: Review your credit report at least twice a year to ensure there are no additional errors. Finding errors and disputing them can have a tremendous impact on your credit score and your overall ability to get approved by lenders.
  • Avoid multiple new accounts at once: While it’s sometimes unavoidable—like if you need to buy a car at the same time you’re applying for a credit card—try to stay away from opening several accounts within a short period. Some creditors view multiple new accounts as risky. The new accounts can also lower your credit age.

Can I Pay a Company to Fix My Credit?

Credit repair companies work mostly by deleting negative information from your credit report, typically errors. But that’s only one tiny part of fixing your credit score. And you might be able to dispute errors yourself faster.

Not only are credit repair companies often expensive (around $50-$100 per month, according to Experian), but you can do it on your own. And if you really need credit help, you can always seek affordable assistance from a nonprofit credit counselor through the National Foundation for Credit Counseling.

Conclusion

All the tips above should point you in the right direction to help you improve your credit score and qualify for a good mortgage for your home purchase. While credit score is only one factor lenders consider when you apply for a mortgage, it is a factor you have total control over and can start preparing for now. 

Questions about credit scores and credit worthiness? Want an idea of what home price range you may qualify for? Contact us and we can put you in touch with a lender who can answer your questions.

Ready to look for a home in Georgia or Florida? Reach out and we’ll help you get started on your home buying journey!

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