If you’re planning to buy a house and your credit score is low, you may find yourself squeezed out of the market, either because you don’t qualify for a housing loan or because the interest rate is too high. If your current credit score is below 620, you’ll want to work to increase it before you actively begin pursuing a mortgage and buying a house. Remember, the higher your credit score when you apply, the better interest rate you get, which can make a huge difference in how much you pay in interest over the life of the mortgage. There are several steps you can take to raise your credit score in six months.
Pull Your Credit Report
All Americans are eligible for a free credit report once a year. Pull yours at annualcreditreport.com. Then, carefully look over the information. If there are any errors, you’ll need to get those fixed. This process can be time consuming, so pull your credit report early in the process of raising your credit.
Get Your Credit Optimization Down to 50% or Lower
Ideally, you’ll want your credit optimization (how much credit you have in total available vs. how much credit you’re currently using) down to 30%, but if you have too much outstanding debt for that, try to get it down to 50%.
That means if you have three cards and a credit limit total of $30,000 between the three cards, you’ll want your balances to be less than $15,000 total (for 50% optimization), or ideally $9,000 or less (for 30% optimization).
You’ll want the optimization to be two part—for the total amount of your credit limit as well as for each individual card. So, in the example above, let’s assume each of the three cards has a $10,000 limit and you have 30% optimization, or $9,000 in debt. That’s a good ratio for your total debt, buy you’ll also want that same ratio for each individual card. So, your credit score will be higher if you have $3,000 on each card versus $9,000 on one card (90% optimization on that card) and no balances on the other two cards.
There are two ways to reduce your optimization.
Increase Your Credit Limit
Call each of your cards and ask if they can increase your credit limit. If you have a good history of making timely payments, many credit card companies are willing to increase your credit limit immediately by $500 to $1,500 or more. When you increase your credit limit, you reduce your total credit optimization.
Pay Down Your Cards
If you have the extra cash, pay down your cards as much as possible, which will also help reduce your optimization. You may even want to get a second job temporarily so you have more money to reduce the balance of your cards.
Get a Consolidation Loan
Another option to improve your credit score, if you already have fairly good credit, is to get a consolidation loan. Having a consolidation loan through a bank versus having credit card debt will help increase your credit score.
Final Thoughts
If you want to buy a house but have a fairly low credit score, put your plans on hold for six months so you can actively work on increasing your credit score. You’ll be glad that you did so you can secure a lower interest rate on your mortgage, potentially saving you thousands of dollars in interest over the life of the mortgage.
My Question for You
What are your best strategies for increasing your credit score? Did you take the time to improve your credit score before buying a home?
This post was from Melissa Batai