Over the past almost three years, my husband and I have been busting our rear ends to improve our credit scores to buy a home. Which hasn't been an easy task to accomplish at all. So I'm going to help you improve your credit score with a few things I've learned along the way.
If you want to improve your credit score, it takes time, commitment and determination.
You can't just say “Hey I'm going to improve my credit score” but don't do a darn thing. Trust me, it doesn't work that way. You have to actually WORK wanting to improve your credit score.
My problem was that I had BAD credit. I co-signed for a vehicle for my ex that was repossessed, I had credit cards I ran up when I was younger and didn't know a darn thing about finances. I was just thinking “Hey free money!” And let me tell you, there is NO such thing as a free lunch! I think my score had dipped down to like just under 400 across ALL 3 bureaus.
Yeah, disgustingly bad!
My husband's problem?
He had NO credit. lol NONE!
Before we got married, he put his foot down and said “I'm never getting a credit card! I don't like them at all.” Little did he understand, that he needed at least 1-2 in order to build his credit if we had hopes of ever owning our own home.
Over the next 2-3 years, we gained a few credit cards, paid on them religiously. What we used, we paid off within a couple months. We didn't like having a balance. There are a couple cards that do carry large balances, 1 is my business credit card which is carrying a large balance right now because I pay all of my blogging stuff for a full year in advance that way I don't have to worry about stuff coming out of my business checking. And my husband's one credit card because he gifted me a new computer and printer this year.
I wrote a post awhile ago about eliminating credit card debt, which will help improve your credit score!
Check it out here:
I budgeted like crazy! Like I mean, every month I was cutting stuff out that we didn't need, arranging payments to avoid late fees, etc. I'm typically a month ahead on MOST bills now because I don't want to get behind. You can read more about my favorite budgeting tips below.
Since we've been working so hard on getting our credit right, we decided to take the leap and “try” to buy a home. We were already ready for the “I'm sorry, you're income and credit score isn't where it needs to be just yet, try again in about a year!”
Instead, we got the “You guys are looking fantastic for an USDA loan!”
If you're not familiar with that, it's a loan specifically for houses that are in more rural areas. Which is EXACTLY where we want to live. My husband and I have always wanted to live in the country. We wanted a minimum of 2 acres, ideally 10 acres, but we're okay with 2 acres. We want to have the space for a veggie garden, parties, etc. We want to be able to “camp” outside or have the kids do so.
Several months before you begin to look for a home, you should take steps to get “credit approved” for your loan. Start by making a list of all your existing loans and credit cards, with the company names, account numbers and monthly payment amounts. This will help you to analyze the information shown on your credit report. Include all closed loans and credit cards if these records are available.
Get a Financial Check-Up
Make an appointment with a good mortgage lender, and request a full credit approval. As a part of the approval process, your credit report will be ordered. It will include data from the three main credit reporting agencies – Equifax, Experian, and Trans Union. The report will show three credit scores – one from each agency. The interest rate and type of loan available to you is related to your credit score.
The assistance of a mortgage professional to help you to understand your credit report and offer suggestions on how to improve your score is invaluable. For the average person, interpreting a credit report and dealing with errors is a daunting task. Credit reports are filled with frustrating jargon and codes. They are not written for the general public to read. Even more intimidating is the task of communicating with credit agencies to dispute or correct information.
Credit reporting agencies often have mistakes in their data. The information in your credit file is input by computers. A computer weighs your data using complicated mathematical formulas to arrive at a credit score.
Nearly everyone has paid bills late for one reason or another. Perhaps a bill was sent to a wrong address, or you have had a dispute with a vendor. It is likely that you have some issues on your report that should be disputed or corrected. Each of the websites of the three main agencies has a dispute resolution page. Feel free to use it.
Deal With Real Credit Issues
You may have had serious credit problems at some point in the past. Reviewing this may be emotionally draining, and will bring up the underlying situation that caused the credit problems. Get advice on how long the issues will remain on your report, and how to re- build your credit worthiness.
Or, you may have a persistent habit of overspending. In this case, you should talk with a financial advisor or personal counselor to help you work out of debt, and establish better habits. The National Foundation for Credit Counseling offers low cost assistance for serious credit problems. If you place yourself under their supervision to handle your debts, you will not be able to obtain new credit during the work-out period – which may be years. Before doing that, ask a mortgage lender or financial advisor if there is a way to redeem your credit without their supervision.
Check Your Credit File
A law, passed in 2005, requires the three main credit agencies to provide a free credit file disclosure each year. It has been suggested that you could order a file from the first agency in January, one from the second in May and one from the third in September. The central site where your file can be ordered is annual credit report dot com. The purpose of this law seems to be to help people find out if they are a victim of identity theft. This enables you to monitor your file for any new credit that did not come from you.
If you take advantage of the free credit file reports, you should check them for mistakes. Use the credit report that you reviewed with your mortgage lender to compare with the data in your credit file. Keep in mind that the free credit file disclosure is not a credit report. It does not include a credit score.
Understand Credit Scores
- Less than 620 – Poor
- 620-680 – Average – You may need to put more cash down on your loan.
- 680-720 – Good
- 720 – 800 – Excellent
- 800-850 – Seldom seen
Play by the Rules – The information in your credit file is scored by these factors:
- 5% – Payment history – Paying bills on time is very important. Today many people use auto draft or pre-written checks through online banking to pay bills. These help to prevent late payments. If you want a good credit score, do not pay late!
- 30% – The relationship between your available credit versus how much you have used is an important factor in your score. If you are over 50% drawn against your available credit, this will count against you. For this reason, it helps to keep old credit card accounts open, even though you do not use them. They build up the total amount of credit available to you, relative to what you have charged.
- 15% – The length of credit history on each loan has an effect on your score. A more seasoned loan is scored higher. For this reason it is not a good idea to open credit cards offering low initial rates, then close them after a few months and open new credit cards.
- 10% – The number of inquiries made on your credit report affects your score. Each time you open a credit card or new loan, your credit information is pulled. Keep these to a minimum. A recent law has made it possible for people shopping for homes or autos to have multiple inquiries, from the same industry (mortgage or auto), done over a 30 day period without penalty. However, to be on the safe side, do not allow your credit report to be pulled unless absolutely necessary.
- 10% – The types of credit used may hurt your score. Loans from finance companies, signature loans, furniture loans and some retail store loans are considered a poor judgment because of their high rates, and may count against you.
Improve Your Credit Score
It is easy and necessary to borrow money. We customarily make everyday purchases using credit cards, and set up loans for homes, cars and other purchases. Your credit score is especially important in the purchase of your home. It will affect the type of loan available, down payment required, and interest rate charged. A low score can cost you thousands of dollars in additional interest over the years. Even insurance companies factor your credit score into their decisions. More than ever, you need a good credit score, or you will pay the price.
Finance providers, rental agencies, car dealers, insurance companies and credit card companies are not going to help you improve your credit score. In fact, they have an economic interest in charging you a higher rate. It is up to you to be proactive about understanding and improving your own credit score. A good time to start is when you begin the mortgage approval process for a home purchase. It is a good habit to have.