Disclaimer: I am not a tax or financial professional, these are simply some educational tips that have worked for me that may or may not work for you.
It’s no mystery a good credit score is paramount to qualify for a home mortgage. Would you lend someone hundreds of thousands of dollars knowing they have a track record of not always paying back on time, or at all? Credit payment history plays a huge role in producing your credit score, but did you know that 60% of Americans have credit card debt they’ve been carrying for over a year? (Bankrate.com) Despite being able to qualify for an FHA loan with credit as low as 580, you will have many more loan options and favorable terms with a better credit score. Other loan products, such as conventional loans, often require a credit score of 620 or above, but that doesn’t mean you’re out of luck if you don’t have that.
Getting your credit score back up in running: As previously stated, payment history plays an overwhelming role in producing your credit score. Other factors, such as age of credit line and amounts borrowed also play a role in this, but let’s take a look at what we can do about payment history.
Starting from scratch: Resolving previous debt. The first step to improving your credit score would be to address credit lines that are unpaid and quickly racking up interest charges. If paying these off is an issue, I would contact the lender and inquire about a debt consolidation payment plan, this will help reduce incurring ongoing fees and allow you to start paying down the balances owed.
Transfer Balances: Many credit card companies now also offer the ability to transfer balances to other credit cards with low or no interest for a set period of time (for example, 0% APR for 12 months). This will buy you time to pay down debts without incurring new interest on that debt, assuming you are not charging new purchases to that account.
Request higher credit limits: Your credit utilization ratio also largely affects your credit score. For example, if your credit card has a limit of $20,000, and you utilize $10,000 on that account, you are utilizing 50% of your credit line. Many experts recommend not exceeding 10% of your credit line, although some say you can use up to 30% without adversely affecting your score. The point is, by increasing your credit limit, let’s say from 20K to 40k, you’ve not cut your credit utilization rate in half. Not to mention, increasing your credit limit is as easy as a quick phone call to your card company, the worst thing they can say is no.
Become an authorized user on a good credit account: Some people are really good at paying their credit card bills on time, and if you can become an authorized user on their account, even if you don’t actually use the credit line, the history of good payments on this account will also reflect on you, as an authorized user, allowing your score to also improve.
Final point: Changing habits: Let’s be real here, we got in this mess somehow, so now we have to make sure we don’t fall back in, especially if you are trying to buy a home. Once credit lines are paid down and beginning to improve, it’s important to consider your habits with credit cards. If you know that you tend to charge things on the card and fall behind on payments, maybe it’s time to put the credit card away and strictly use a debit card until your credit is in a better spot. I know this is much easier said than done, especially with today’s inflation rates, but worth considering if you can swing it.
In conclusion, credit score can be detrimental to your home loan qualification, if not properly handled. If the concept of improving your credit sounds daunting or overwhelming, I would suggest doing baby steps with the tips I gave above. Sometimes, simply tracking can make a huge difference in your rate of consumption, this holds true for finances, fitness/diet, and many other areas of life. “Where focus goes, energy flows” – Tony Robbins.