By: Demetrios Salpoglou
For people who have a poor credit score, the dream of owning a home may seem out of reach. Nowadays, lenders are more stringent than ever when approving mortgages, and even with an FHA loan, you still have to have some sort of established credit to buy a home.
If your struggling with a poor credit score, there are a number of things you can do raise it. Some of these things can make an immediate positive affect in your credit scores, while some may require some time, patience and discipline. If you take these steps, you’ll be well on your way to improving your credit.
Pay down your balances
This route can have the fastest and biggest impact on your credit score. 30% of your credit score is made up of credit utilization (the ratio between your borrowing limit and your current debt). The recommended level for a healthy credit score is 25% credit utilization or lower, meaning you are using less than 25% of the sum of all your credit limits.
You can even go a step further to schedule your monthly payments to occur right before the balances are reported to the credit bureaus. All credit companies must report all of their account balances to the credit bureaus once a month. You can easily call your creditor and ask what day of the month they send the report in, and you can schedule your payments for a few days before that date. Now, your creditor is reporting a low balance to the credit bureaus every month, ensuring you maintain an low credit utilization ratio.
Get your bills current
Paying bills on time will not always raise your credit score, but paying bills late consistently will definitely negatively affect your score. Reports for late payment are usually made 30 days after the payment is due. This is one of the most important factors in credit score ratings.
Service providers may also receive calls asking them to report payment histories for credit reports. This is believed to increase credit scores when a customer has good payment history. Sounds like a good deal. However, bill payments such as electricity and gas are slow to show up on credit reports in major credit-reporting agencies. These payments only tend to show up when they are late or delinquent.
Contact Collection Accounts and Negotiate
Negative credit items such as collection accounts stay on your report for 7 years, and can make it impossible to improve your score. If you have open collection accounts, take the time to call them and negotiate. They want to collect the amount owed much more than they want to harm your credit, and many companies will offer to remove the collection account from your credit report in exchange for paying off the balance. Make sure you get this in writing from the collection agency before you pay off the limit, and show it to the credit bureaus in case the collection agency fails to remove the negative item from your credit report. There are companies you can hire that will help you with this.
Open a new account
You can witness a growth in your credit score in two ways when you open a new account;
• Your utilization should improve by opening up a new card as the total outstanding credit line increases and your credit utilization decreases
• An improvement in your credit mix; If you only have a small loan or one credit card, getting another type of card indicates to credit bureaus that you can handle different account types.
Avoid opening multiple new accounts. Recent inquiries for card applications can impact negatively on your credit score. Also it is not recommended to open new accounts if you’re applying for a mortgage application, as it can potentially complicate the process.
Become an authorized user
Do you know a responsible family member or partner with good credit scores? Their good credit history can reflect positively on you by having authorized use of one of their accounts.
Their good credit history will immediately be visible on your credit report, thereby increasing your credit score through a higher average account age.
Good credit takes years to build and there is certainly no way to get a good score overnight. However, the above tips are great action items you can take on your way to improving your credit, which will pay dividends when purchasing a home. Remember that your interest rate is largely dependent on your credit score, so buyers with good credit will pay less monthly on a mortgage, and much less in interest over the life of the loan. Having good credit isn’t easy, but it’s worth the time invested to improve it if your looking to buy a home.