How Homebuyers Can Improve Their Credit
Written By: Sarah Szczypinski
It isn’t just the number in your bank account that you need to pay attention to as you work to improve your finances before you buy a home. Credit health is essential to securing the best mortgage interest rates and terms — improving your credit scores before buying can save you thousands over the life of your loan. Your score health is based on the information found in your credit reports. In those reports contains five factors that prove ‘Homebuyers Can Improve Their Credit’.
- Payment History: This is the largest influencer of your credit scores. How you manage existing accounts can play a drastic role in mortgage approval. These accounts include revolving accounts (like secured and unsecured credit cards) and installment loans (like student loans or auto loans). Paying your bills on time is crucial to maintaining good credit scores, so if you tend to have trouble doing so, consider setting up automatic bill pay to reduce the odds of that happening.
- Debt: Debt is a useful credit tool when you can comfortably afford your payments, but too much can negatively affect your credit scores. A good rule of thumb is to keep your debt level at 30% or less of your total credit limit. If you’re far above this, this could be a good thing to work on to help improve your scores.
- Credit Length: Time is valuable in the world of credit scoring. Credit age implies experience, especially if your accounts remain current and positive. There isn’t much you can do to improve this category, other than let time pass. However, this is important to keep in mind if you’re considering closing any accounts, as doing so could harm your overall credit age.
- Credit Diversity: Lenders typically value applicants who have experience with different credit types — think credit cards and a car loan instead of just one or the other — as this shows you can manage different types of credit. Although there’s no exact science here, it’s generally a good idea to have a healthy mix of revolving and installment accounts to best illustrate your money management skills.
- Inquiries: Applying for new credit is part of maintaining active credit reports, but overdoing it can make you appear risky to potential lenders. Consider applying for new credit only when necessary to strike a healthy balance.
Keep an eye on your goals and creditworthiness by reviewing copies of your free credit reports from the three main credit bureaus, which you can do once each year by visiting AnnualCreditReport.com. Buying a home is an exciting process that takes time and planning to achieve, in no time you’ll be able to settle down and get started on the real challenge: decorating!
Sarah Szczypinski is a journalist for Credit.com specializing in credit repair, student loans, budgeting and other personal finance topics. Her work is featured on MSN, GOBankingRates, The Huffington Post, Lexington Law and CreditRepair.com, among others. She lives in Seattle with her husband and son.
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