Ready to buy a home, but your credit score score is less than stellar?

Let’s talk about how to improve your credit score to help you buy a home with better terms.

When starting a mortgage application, a mortgage lender will need to pull your credit from the three credit bureaus of Transunion, Equifax, and Experian. This mortgage-specific report will also show your credit score created by the Fair Isaac Corporation, known as your FICO score. FICO scores range from 300 to 850. This credit score, specifically from a mortgage inquiry credit report, may differ from the scores provided by other credit monitoring services or other credit inquiries.

A higher credit score will help you more easily qualify for a mortgage loan. It will also allow you to obtain better terms such as a lower interest rate, lower closing fees, or both. 

First, this one goes without saying. Pay your bills. Avoid late payments, collections, judgements, charge offs, foreclosures, and bankruptcy, and the like.

Now that we’ve got that housekeeping item out of the way, let’s dive in.

Correct reporting errors

https://www.ftc.gov/legal-library/browse/statutes/fair-credit-reporting-act

The Fair Credit Reporting Act has a number of rights designed to protect you as a consumer. Within that are three important rights that can help you improve your credit score. 

1. You have the right to dispute incomplete or inaccurate information
2. Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable information
3. Consumer reporting agencies may not report outdated negative information

Simply put, you have the right to make sure the items reporting on your credit are accurate. And you have the power to get them fixed if they’re not. 

To dispute inaccurate or outdated information on your report, go to https://www.annualcreditreport.com/filingADispute.action to begin your dispute online. This process can take up to 30 days to complete. Remember, the creditor is not required to update or remove ACCURATE information. Only inaccurate or unverifiable information. Correcting reporting errors may help to increase your credit score.

Improve “balance to limit” ratios

Your balance to limit ratio, also called your utilization rate or your utilization ratio, is calculated by dividing your credit card balance by your credit card limit. High utilization can be an indicator of credit risk so your score will be pushed lower. The lower your balance to limit ratio, the better. 

To start with, it is recommended that all credit card balances be below 50% of their limits. A balance to limit ratio under 10%may also greatly help to improve your credit score. To accomplish this, you can;

1. Pay down your credit card balance.
2. Request and successfully obtain a credit limit increase.

Or a combination of the two. Reducing your balance to limit ratios may help to increase your credit score.

Avoid new accounts – 3 x 12 rule
The age of your most recently opened account will play an important role in your credit score. Avoid new accounts as it will take a while to earn substantial credit history on a newly opened account. A good rule of thumb is 3 x 12. That means: 3+ open accounts with good payment history reporting positively for 12+ months. Avoiding new accounts and applying the 3×12 rule will help you increase your credit score.

Authorized user
After you’ve paid your bills on time, corrected reporting errors, and improved your balance to limit ratios, you may be asking how you can speed through the 3×12 rule. One way you may be able to do that is by being an authorized user on someone else’s credit card. This can sometimes result in the history of that credit card account being reported to your credit report. Find someone who uses a small portion of their credit card limit and has a clean payment history on an account that’s been open for a long time, and ask to be added as an authorized user. Keep in mind that by doing this, you may inherit all of the risks of that account, such as negative payment history or high balances.

As a bonus for reading all the way through to the end, I’m going to give you one extra tip! This one you’ll really like. And, so will your mail carrier! 

https://www.optoutprescreen.com/ 

Optoutprescreen.com is a joint venture among the credit bureaus where you can opt out of receiving unsolicited offers of credit – like all of those pesky credit card offers that come in the mail. Surprisingly, opting out of these offers tells the credit score algorithm that you’re a responsible borrower and can sometimes bump you up a few points on your credit score.

These are some simple ways you can improve your credit score. And remember, a higher credit score will help you more easily qualify and get better terms for your new mortgage loan.