Prepare to Buy a Home by Repairing Your Credit Score
How to Fix Your Credit Score Before a Home Purchase
Your credit score will have a big impact on the rate you’re able to secure on your mortgage, which will have a big impact on your monthly payment and the affordability of your new home. The higher your credit score, the lower the mortgage rate.
If you’re preparing to purchase a home, but your credit score is low, here’s how you can proactively repair it.
Check Your Credit Report
First things first, figure out what you’re working with where your credit is concerned. Start by requesting a copy of your credit report to see if there are any errors.
Why is this step important? The information and data on your credit report is used to determine your credit score. Look for things like incorrectly labeled late payments and double check that all of the accounts and balances listed are accurate and belong to you.
Keep Your Minimum Balances Low
A big part of your credit score is your credit utilization rate, which is the percentage of how much of your revolving credit you’re actually using. You want this number to be low- 30% or less is ideal.
If your percentage is higher than 30% it’s time to start paying down balances. Even if you pay your balances in full each month you could still have a higher utilization ratio than expected. Some credit issuers take your statement balance and report that number, so it’s helpful to check.
Free tools like CreditKarma.com are one useful way to monitor this important percentage (and your overall credit score).
Get Rid of Nuisance Balances on Your Credit Cards
Paying down your debt is a surefire way to boost your credit score before purchasing a home, but there’s another caveat to that suggestion: paying down nuisance balances.
Nuisance balances are all of the small balances accumulated across your credit cards, like $75 on one, $60 on another, and $100 on another card.
According to John Ulzheimer, a credit expert who has worked with FICO and Equifax, “A good way to improve your credit score is to eliminate nuisance balances.” According to Ulzheimer, the number of cards you have that carry balances impact your credit score.
Pay those balances off, and then use one or two credit cards for your purchases.
Additional Ways to Improve or Repair Your Credit Score
There are a number of ways to improve your credit score. The first three suggestions listed will get you started, and these others will propel your efforts:
- Avoid opening any new lines of credit before you start rate shopping. Hard inquiries on your credit report can lower your score for a period of time.
- That also means you should do your rate shopping over a short period of time. As Ulzheimer says, “don’t dillydally”.
- Keep old lines of credit open, like an old credit card, because another component of your score is the average age of your accounts.
- Pay all of your bills on time, because late payment can lead to a drop in your credit score.
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