Since we’ve been on the topic of credit scores lately, we thought it would only be fitting to let you know how to improve your credit score to get that mortgage and the home of your dreams! Although there are a few options out there for getting a mortgage with less than stellar credit (see our previous post here) your best bet in the long run is to improve your credit score before applying for a loan. Here are a few tips for anyone who wants to improve their credit, whether you’re deep in the 400’s or trying to take your score from a “Good” to an “Excellent”, here are 5 things anyone can do to boost their chances of landing that loan.
Tips To Improve Your Credit
1. Know Your Credit Score
The first step in improving your overall credit score is knowing exactly where you’re starting at. Starting with the basics, a credit report is something a lender can look at to see how good you are at handling your credit from month to month. So, whether you’re a credit master and pay your balance in full every month, or you’ve constantly been in collections, the credit score company will find all this information and put it into one neat score for lenders to see.
Your credit score is based on a scale of 300-850. The national average credit score in America as of July 2015 is about 650, which (depending on which credit score company you use) is a “Fair” to “Good” rating. Anything above 700 is considered “Good” in the lenders eyes and you will most likely be issued new credit or a mortgage. So no matter where you’re starting at, it’s incredibly important to know your number – even if it makes you cringe.
2. Keep Credit Card Balances Low
The truth is, when you’re looking to improve your credit score, you’re going to have to pay down your debts. You knew this was coming. But what’s even more important than paying off your debt, is keeping it down.
If you’re someone who has a low credit score but still has access to credit cards, it’s important to know that carrying a balance over 50% of your available credit, even if your making regular payments, can hurt your credit score. Keeping your account balance low, paying the minimum payment, or ideally paying the balance completely each month is one of the best ways to build back your credit.
If you’re past this point and have had to apply for bankruptcy or have gone to collections, another option is to apply for a secured credit card. Secured credit cards require you to put money up front as collateral and from there, you can use it as a regular credit card to help boost your score. Of course, you still have to make regular payments, keep your balance low and ideally pay it back in full each month, but it’s a great way to get back on the right foot when it comes to repairing bad credit.
3. Be On Time, Every Time
This could be the most essential step of this credit building program. Paying on time, every time is absolutely essential for lenders to see you in a positive light. This is a great time to start utilizing your bank or credit card providers email or text notifications to tell you when you have a payment coming up. Most of the time, these can also tell you how much it’s going to be so you can budget accordingly and never miss a payment.
If things are rough and you’re unable to make the minimum payment because of financial reasons, you can contact your institution (before your payment is due) and ask for an extension. Many times, they will give you an extension without any penalties. Many establishments will also grant a one-time late payment forgiveness, to let you off the hook.
It’s important to know that even if you’re in a financial bind and can’t pay your minimum payments, it is never a good idea to take a payday loan to cover them. Taking out these short term loans will not only end up costing you a fortune in interest, but it will also show on your credit report – hurting it further.
4. Just Say No!
It’s a little known fact that each one of those retail credit cards you sign up for, even if you don’t end up getting them, hurt your credit score. Each time a retail company does an inqiry into your credit report to see if you’re eligable for their card, it counts as, what the credit score companies call, a “Hard Check“. Hard checks knocks a whopping 7 points of your credit score for each check, so if each store in the mall ropes you into signing up (even if you just do it for the discount) you could be losing 50 points in a single day.
To put things in perspective, getting that 20% discount for singing up for the latest retail credit card could cost you your mortgage approval if you’re going from a score of 700 to 650.
5. Variety is Key
As counterintutive as it may sound, having different types of credit (such as credit cards, car loans or mortgages) can actually help your credit score in the long run. While it isn’t a good idea to start applying for loans when you’re in debt and racking up new credit cards, this tip is at the bottome of the list for a reason.
Once you’ve got your credit back under control and have been making payments on a secured credit card regularly enough to improve your credit score a bit, it’s time to switch to an unsecured credit card and apply for any loans you may need. Successfully juggling credit cards, student loans or car loans is a great way to show the bank that you’re capable of handling all types of different credit. Many lenders take this into consideration when deciding how much and what interest rate to lend at.