Credit scores are the most significant driving factor in deciding what mortgage loan you will be eligible for and what interest rate you will qualify at. It’s crucial that you make sure your credit score is as high as possible before applying for a mortgage loan or any loan for that matter; otherwise, you will be paying for it for many years to come.
Financial institutions pull your credit score because it’s a reflection of how you’ve handled your finances in the past. They use that as a gauge on whether they should lend money to you or not. There are other factors that are looked at when trying to qualify for a home, but credit scores is the top factor. This article will discuss credit scores, how they work and 5 of the main actions that you can take to improve your credit score as quickly as possible.
There are different credit scoring models out there but the most common one is called Fair Isaac Credit Corporation or FICO Score. This has been and is the leading credit scoring model used in the United States. It uses a scoring system that ranges from 300 – 850 with 300 being the lowest score that you can have and 850 being the best.
It takes years to develop a credit score over 800. The same thing can be said for a score of 300. Serious financial mismanagement would cause this. You want to have as high of a credit score as possible when applying for a mortgage because it will save you a tremendous amount over the span of 30 years. To obtain the best financing options/rates, a credit score above 740 would be ideal.
How much money will it save you if you can improve your credit score? This is strictly for illustration purposes. If you were to take out a mortgage loan for $200,000 and have a credit score of 780, you may qualify for an interest rate of 4.75%. If you have a credit score of 680, you may qualify for an interest rate of 5.125%. The difference in interest rates (.375%) over the course of 30 years of loan repayment, would cost you an additional $64,827 in interest.
That is a substantial amount of money. To avoid that situation, be proactive before buying a home and put yourself into the best possible credit score position. If a financial institution has pulled your credit, it doesn’t mean that you are stuck using that score. You can work on things to improve your credit score so that you’re not stuck with a less than desirable interest rate. You can make some very large improvements with your credit score in 60 days!
You might be asking yourself, how can I improve my credit score in 60 days when it took me 10 years to acquire the score that I have? Or, what can I do in 60 days that will make any difference with my credit score? These are valid questions & concerns. Nobody knows the exact algorithms that are used with the FICO Score, but experienced Lenders know what actions need to be taken on a credit report to create the largest impact.
The reason 60 days is the desired time frame is that credit reports update once every 30 days. When you make any changes to your credit report, you will want to give it at least 1 full cycle to repair itself. Two cycling periods is ideal so that your credit has more time to heal after the actions you have taken. Here are the 5 most important actions that you can take to improve your credit score in 60 days:
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Late payments have a huge impact on your credit score. Having late payments on home mortgages and car loans impact your scores more than smaller items like credit cards or small personal loans. If you do have late payments on your credit report, see if you can get them removed. Contact the institution to see if they will grant you a good-will reversal.
For example, if you have a car loan that you’ve made on time payments with for the past 2 years and you made a mistake one month that resulted in being marked late on your credit report, you may be able to receive a good-will reversal from that company. It doesn’t hurt to ask especially if you have a clean repayment history with them and the occurrence is a one-time thing or happened during a difficult financial period in your life. If you’re able to get late payments removed, make sure the company gives you something in writing and tell them to update your credit report immediately!
These accounts take a very large toll on your credit score because it usually means you decided to neglect your payment obligations. Companies want to recoup the money they have lost, so they will place collections or judgments on your credit report. The best thing you can do is to contact whomever it is that’s reporting this on your credit report and wipe the slate clean by paying them in full or settling the account in some way with them.
On the flip side, there are times when things show up on your credit report that you’re not even aware of such as an energy bill from a previous home. This can be frustrating because you never intended to avoid your obligation, you just weren’t aware that there was one. Collections, judgments and tax liens are like late payments in the sense that as they age and become older, they have less of an impact on your score. When you pay these accounts off, make sure that you receive some form of documentation that the account was paid and then make sure to tell the company to update your credit report immediately!
This is my favorite action to discuss because there are multiple ways to go about it and some tips that can help you cure the accounts very quickly. The main thing is to keep your revolving accounts (credit cards & personal lines of credit) at minimal balances. Ideally, you want to keep these accounts at balances of less than 30% of whatever the account’s limit is. For example, if you have a credit card with a $1000 limit on it, make sure that you don’t carry a balance that exceeds $300.
As soon as you exceed 30% of the account’s limit, you will start to notice a decrease in your credit score. 30% of the limit isn’t a lot on some accounts especially if you have a smaller limit, so make sure you are careful with your usage. Besides keeping an eye on your balances and not going over the 30% threshold, another trick is to just contact the company and have them increase your limit. For example, $300 charged against a credit card with a $1000 limit is 30% but if you reach out to the creditor and they agree to increase your limit to $2500, that $300 balance now puts you at a 12% debt utilization ratio.
These loans are offered by financial institutions and are known as debt consolidation loans. Take out a personal loan to pay off the credit card because personal loans or installment loans are looked upon much more favorably than carrying balances on revolving accounts like credit cards. It doesn’t seem like it makes sense, but you can be maxed out on a credit card and then take out a personal loan to pay off the credit card and your score will jump by leaps and bounds simply because you moved your debt into a fixed payment loan vs. a revolving account. Your score can improve from simply moving debt around.
Go through your credit report and correct any errors that appear on it such as bad addresses, unknown accounts, name misspellings and in general anything appears incorrect. You want your credit report to be an exact reflection of you and not anyone else. Make sure the information reporting on it is accurate. When you do this, make sure you receive something in writing from the company so that you can try to hold them accountable.
If you do these things and give your credit report 60 days to heal, you will see an increase in your credit score and more importantly, you will be putting yourself in a better position when trying to qualify for a home mortgage. A little extra effort on the front end will save you a lot of money in the long run and you will be happy that you took the time to do it. This could also mean an increase in the amount of money a lender will approve you for because of getting a better interest rate.
I hope you find this article helpful. If you do, please share it with others on your Facebook page so they can also up their credit scores, which they will thank you for it.