How to Improve your Credit Score to Buy a Home
With interest rates at a historic low, now is a good time as any to purchase a new residence. Your monthly payment will be based upon three factors.
- The sales price
- The interest rate
- The total amount in years of the mortgage
One of the most important factors in securing the lowest payment will be the interest rate on the mortgage. The interest rate you qualify for will be based upon your credit score. You may also have heard the term FICO score which is another type of scoring system that lenders will use.
A great credit score can help you in a multitude of areas in your life. A low one will do just the opposite. Did you know that many employers are now checking scores of their applicants they interview in making a final hiring decision?
So let's talk about what a credit score really is, why we need one, and what we can do if our score stinks.
What is a Credit Score
According to Credit Card Insider, your score represents a level of risk that lenders use to determine how worthy of a borrower you are. The score will be totally based upon your history as a consumer. Any loans, credit cards, or other financial history that you have will be calculated in the final total.
The good news is that the final tally will be completely based upon your behavior in paying back any loans. If you have always honored your agreements with creditors, you can rest easy knowing that you will be seen as credit worthy in the eyes of the lenders.
You should also know that there are certain items that won't factor into your score.
- How much money you make
- Where you live
- Your race or how old you are
- Checking your credit score (many people believe that this can hurt your score, but it's such a minor issue)
The higher the score, the less risky you are, and as a result, you will enjoy lower interest rates. Lenders are always looking for low risk borrowers who will enjoy very low vees and other types of perks.
Credit Score Ranges
All credit scores will fall inside a range. There is a minimum and maximum range from 300-850. Remember that the higher the score, the better.
According to Experian:
300-579: Very poor credit. Don't expect to be approved. If you are, you will have to pay some sort of deposit.
580-669: Borrowers here are considered subprime. They are not the worst, they are just fair.
670-739: This is considered good credit. Only about 8% of borrowers will get behind on their payments.
740+: Anything at 740+ will receive some of the best rates from lenders.
If you have a lower credit score, there are some tactics you can use to get it going in the right direction. Remember that this isn't a quick process. It will take some real effort and work on your end.
How to Raise Your Credit Score as Fast as Possible
The credit companies like Experian will tell you what affects your score the most. We will want to address those obstacles first.
Do you pay your bills on-time? If not you will want to start doing so. Payment history can account for as much as 35% in some cases. Lenders certainly like to see you paying your bills when they are due.
If you are having trouble remembering to pay bills, set up autopay. As you start to make your payments on-time you should notice that your score will begin to increase.
Credit Utilization Rate
This sounds more complicated than it really is. Your credit utilization rate is the total amount of credit you are using. This can account for 30% of your entire score.
Individuals who max out their credit cards have a very high credit utilization rate.
- If you have 2 credit cards each with a maximum credit limit of $2000
- And you are currently carrying a balance on each card of $1800
- Your credit utilization rate would be $3600/$4000 = 90%
The best way to bring these percentages down is to start making more than the minimum payment on your credit card. If you make a larger payment on your credit card today, your utilization rate will begin to decrease.
Some experts believe that your utilization rate should be under 30%. People that have higher credit scores use much less than this.
Remember that if you have damaged your credit score, you can reverse the trend quickly.
You only need a high credit score for the best rates if you intend on borrowing money. For most people who purchase a home, they will need to take out a mortgage from a lender.
Focus on what matters most when it comes to increasing your score.
- Start by making payments on-time. Whether it's paying your cable bill or credit card bill on-time. Payment history makes up one of the biggest components of any score.
- Keep your credit utilization rate low. Start by paying down your credit card balance. Little by little this will increase your score overall.