Fixing Your Credit Score

When getting ready to shop for a home loan, it's worth taking a look at your credit report. Your credit score is a big factor when lenders take a look at your loan application, and it plays a huge role in the interest rate you get.  

To start improving your credit score, it helps to know what goes into making it. The factors that affect your score are:
 

• Timely payments: 35% 
• Overall debt: 30% 
• Length of credit: 15% 
• New credit applications: 10% 
• Types of credit: 10%  

Know Your Score 

You need to know what your score is if you want to get started on improving it for a home loan. According to the Fair Credit Reporting Act, individuals have the right to their own credit report, which is available from a credit bureau. You can request your report from these bureaus, the top three of which are Equifax, TransUnion, and Experian. Once you have your report, you can review it and dispute any discrepancies. The bureaus are responsible for investigating any disputes within 30 days. 

Don’t Let Your Balance Go Past-Due 

The most important factor that makes up your credit score is your payment history. 35% of your credit report depends on whether or not you make payments on time. The later you are on those payments, the worse it is for your credit report. Always try to pay off your credit balances in full. Not only does this keep you from incurring large interest payments, but having a “paid in full” remark on your credit report looks good to lenders considering you for a loan.  

Building a Credit History from Scratch 

Many first-time homebuyers run into the problem of not having a sufficient credit history. This can affect the 15% of your score that depends on age of credit. Establishing credit history can start with signing up for a credit card and using it to pay for everyday items. It also helps to set up utility payments through your credit card online. Just remember to pay off the balance on time! 

Be Proactive About Opening New Lines of Credit

When applying for a loan or credit card, your bank or lender performs a “hard inquiry.” This is a review of your credit that in turn affects your score. If you submit multiple credit applications in a short timeframe, it shows up as a red flag for lenders. They might assume that you aren’t handling your finances well enough if you need multiple lines of credit open at once. It’s important that you don’t submit credit applications close to the time that you apply for a home loan.  

Remember that your credit score represents your creditworthiness. Based on this number, a lender determines whether you are a high-risk borrower and if it’s a smart idea to loan you a huge amount of money. It also determines the interest rate you’ll receive from the lender, so it is worth your time to work on increasing your score.

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