When people mention the word ‘credit score’ the subject often brings on fear and anxiety, and for good reason. With the exception of recognizing that the best score wins, the average home buyer knows very little about the whole credit scoring process. Borrowers who have credit that is not so great (sub-prime) and who are eager to move into A-Paper territory often find themselves at a loss when trying to find ways to upgrade their credit history. Now more than ever it is possible for people to improve less-than-perfect credit scores and obtain a loan for the home they truly want.
The first step in the process is making sure that to acquire a current copy of their credit report. Congress recently amended the Fair Credit Reporting Act so that consumers may now receive one free credit report annually. There are three major credit bureaus: Equifax, Experian, and Transunion. Since entries can vary across bureaus try to request a free report from each of the three companies. (www.annualcreditreport.com (http://www NULL.annualcreditreport NULL.com/))
It’s also important to know just what a good credit score is. Most A-Paper scores generally begin around 680. Don’t despair if it comes up shy, there is always room for improvement. Increasing your score just 5 points can save a significant amount of money. For example, if your score is 698 and you increase it to 703, then you could save yourself thousands of dollars over time as a result of a slight improvement to your loan’s interest rate.
According to the various affiliates, while credit repair is necessary for some, it’s not the only way to increase your credit score. Even if you have stellar credit, you can enhance your score through these steps:
- Evenly distribute credit card debt to change the ratio of debt to available credit. Let’s say you have a credit score of 665. If you have debt on only one card, and four additional credit cards with zero balances, evenly distributing the debt of the first card could move you closer, and possibly into, that ideal bracket.
- Keep your existing accounts open and active. The average consumer is usually anxious to close credit card accounts that have zero balances, but doing this can cause them to lose the benefits of a long-term credit history and increase their ratio of debt-to-available credit.
- Keep credit inquiries to a minimum. Each inquiry into your credit history can impact your score anywhere from 2-50 points. When it comes to mortgage and auto loans, even though you’re only looking for one loan, multiple lenders may request your credit report. To compensate for this, the score counts multiple auto or mortgage inquiries in any 14-day period as just one inquiry, so try and stay within that time frame.
Remember, credit scores don’t change over night. Improving them requires time and diligent effort, so it’s a good idea to get the ball rolling at least three to six months prior to submitting an application for home financing.