Boosting Your Credit Score

Once you decide that buying a home is the right choice for you.  It is time to get your credit score in shape. 

The process starts with knowing your credit score.  Knowing what your credit score is and managing it can save you thousands of dollars in the long run. You can go about this in a couple of different ways. 

Option one is to get your credit score for free.  Several websites, such as Credit Karma, offer a free credit score. Credit Karma also helps you analyze your credit score and finds ways to improve it. Some credit card companies offer customers a free copy of their credit report.  However, a home is most likely the most significant purchase that you will ever make.  Therefore, in order to give you the bigger picture, I suggest that you spend the money and pay for a full credit report.  

Option two is to request a copy of your credit score, the one that the lenders see.  Order a copy from one of the three national consumer reporting agencies, Experian, Equifax, and TransUnion.  All three credit bureaus offer a monthly membership at a fee ranging from $19.95-$24.95.  You can also log on to myfico.com for a complete credit report.

Boost Your Score

While you do not have to commit to a monthly membership, it may be worth investing for a few months until you boost your credit score.

Boost your score by following these necessary steps.

1. Correct common mistakes.

While reviewing your credit report, you may find errors such as an incorrect mailing address or an account that is not yours.  You will have to identify these mistakes and contact the credit bureaus or the creditors directly.  This process will not be an easy step, but there are services such as Credit Sesame that will take a look at your credit report and let you know what you can do to improve it.  Credit Sesame will also identify errors on your credit report and help you fix your mistakes.  According to The Penny Hoarder, services such as Credit Sesame can help raise your credit score by 200 points.

2. Pay down your credit cards.

Paying down your credit card balances is one of the fastest ways to improve your score.  An extra $20-$100 a month can help you pay off balances faster and avoid racking up interest fees. 

The Penny Hoarder suggests trying a service called Credible.  

Credible matches you with a loan that will cover your credit card balance.  It is as easy as paying off your loan and making payments towards a new loan with a lower interest rate.  Using Credible could lower your monthly payments and help you pay off your debt faster.

3. Make your payments on time.

You may want to consider automating your finances or using a budget tool such as Mint to track when your payments are due, so you don’t miss any of them.

4. Write a goodwill letter.

Late payments on your credit report can hurt your score. Consider asking the lender for a goodwill adjustment. Make sure that your letter explains that you have been a loyal customer, take responsibility for the late payment(s), and explain what steps you are taking to right your wrongs. Do not forget to inform your creditors about what exactly needs to be removed from your credit history.

5. Leave your accounts open.

It may seem like a good idea to close credit cards that you no longer use, but this may damage your credit score.  You do not have to carry a balance on your credit card to build your credit score.  Keep them open.

6. Use credit wisely.

According to doughroller.net, this means only taking out installment loans (like car loans) when you need to, and in modest amounts.   Just because you qualify for a 30,000 car loan does not mean that is the amount you should finance.  Do not over-extend yourself.

7. Keep Monitoring.

According to Credit.com, those who checked their score 12 or more times a year were almost twice as likely to improve their credit score.  People who check their credit scores more often are more likely to report improvements to their scores.

FICO

Experts recommend checking your credit on myfico.com and using the FICO calculator to help you see how much money you would save by increasing your credit score.

According to doughroller.net, raising your score to the next tier (620-639) up will save you $17,000 over the life of your loan. Raising it to the middle-of-the-road (680-699) range could save you almost $40,000. These savings come in the form of less interest paid over the life of your loan, as well as smaller monthly payments.

*These figures are based on a $150,000 loan for 30 years

Good credit is important

Working on your credit score before you apply for a home mortgage loan is essential, as a higher credit score means a lower interest rate.  Think of your long term savings. 

Understand that building your credit score takes time and that you may want to give yourself 6-12 months to make sure that your credit is substantial. In the meantime, use your credit wisely by making payments on time and paying down debts.  You will see your score increase in no time.