Purchasing a home often involves mortgages, which are loans offered by financial institutions. In order to obtain a mortgage, you must undergo a credit check, which determines your risk factor to financial institutions lending you money. If your credit score is too low or you have a troubling repayment history, you will likely be denied a mortgage.
Thankfully, credit scores are not set in stone, allowing you to improve your score over time by using different methods. Most importantly, you must be patient and consistent in order to improve your credit. If you make a genuine effort, you will eventually qualify to obtain different types of loans, including mortgages. For more information on how to improve your credit, read the sections below.
The first step to raising your credit score is to understand what it currently is. While rare, errors in generating credit reports may happen. Thus, it is important to monitor your credit report and check for a few key indicators of a mistake, such as:
If you notice any issues, it is your responsibility to bring them up with the three major credit unions, which can fix the issue. The three major credit reporting bureaus are TransUnion, Equifax and Experian. If the reports are all correct, look over a detailed report to learn where the problem lies. Most credit scores are calculated by payment history, regularly accessed credit and the length of time that your accounts have been active. Once you know your score and understand how it is calculated, it is easier to plan out how to improve your credit score. Generally, certain factors can impact your score more than others. However, these factors are often not indicated on the credit report.
It is a good habit to monitor your credit reports regularly. In doing so, you see your credit score slowly improving, which incentivizes you to keep up the good work. Additionally, if any suspicious activity appears on your accounts, you are able to catch it more quickly. Suspicious activity indicates possible fraud. Thus, the sooner you notify the credit bureaus about it, the less damage you may experience.
One cannot stress enough how important it is to pay your bills on time. Generally, your payment history is the largest percentage that contributes to your overall credit score. That is because your payment history indicates how likely you are to pay back what you owe. Consequently, lenders pay special attention to this factor when calculating your credit score. If you continue to accumulate late payments, your score is likely going to plummet.
Do your best to catch up on past late payments and keep up with future ones. The more payments you make on time, the higher your credit score will be. If you have difficulty remembering when to pay bills, you may set up automatic payments through your bank account. With automatic payments, you schedule payment plans and do not have to remember paying your bills on a monthly basis.
It may sound counter-intuitive to use more credit if your score has been lowered in the first place, but using credit regularly and often can increase your score over time as long as you make payments on time. In general, the length of your credit lines impacts your score significantly. Therefore, you want to use your cards regularly to build up that length of time. A long credit history reflects positively, as you continue to use credit responsibly.
As a good rule of thumb, you should not spend money on expensive items that you cannot afford. Instead, purchase small things and then immediately pay them off. The quicker you pay off your credit balance, the more your score will improve within a short period of time. After establishing a history of paying your bills on time, you may ask your credit card company for an increase to your line of credit. Doing so will increase your credit score, because it changes your income-to-debt ratios.
It is never good to owe a large amount of debt. An ever-increasing debt that takes a long time to be paid off is a red flag for many lenders. Consequently, this has a negative impact that lowers your score. Overall, the total reported debt you owe is compared to your total credit available. As the debt-to-credit ratio becomes closer, your score begins to lower. As such, you must try to maintain a low debt-to-credit ratio by paying off any debts.
Furthermore, it is important to make a point of putting a little money towards your debts each month. Additionally, it may or may not be in your best interest to consolidate your different debts into a single lower interest account. As an example, a credit inquiry is made when you apply for a consolidation, which may lower your score. By opening a new card, you are also going to temporarily lower your score.
While having a larger credit limit and low debt are good things, it is also important to consider not opening new accounts without real reason to do so. Possessing a certain number of credit lines can be beneficial, but having multiple lines of credit can also harm your credit score if they are unnecessary. Every time you apply for a new credit card, a hard inquiry is initiated on your account. Having too many hard inquiries indicate a high potential to accumulate debt, which effectively lowers your score.
On the other hand, if you already have credit cards you do not use, it may be in your best interest to keep them open. Credit cards with no annual fees or credit in use are beneficial to your credit score. If you close these accounts, you may impact your debt-to-credit ratio negatively and consequently lower your score.
It is crucial to be patient when increasing your credit score. Coming back from a long history of bad credit does not spontaneously happen overnight. Instead, you must be diligent and consistent with your payments in order to achieve this goal. After all, this is what lenders are really looking at when they determine how likely you are to repay the money you borrowed. In general, credit scores are built over time, and there is no way to speed up that process. Therefore, it is in your best interest to keep checking on your scores. Even if all you are seeing is minimal progress for the time being, it will still be gratifying and validate your choices to rehabilitate your score.
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