First-time homebuyers don’t always have a strong credit history. That can be a problem. If your credit score is low, a lender may charge you a higher interest rate or deny your application. Fortunately, there are ways to strengthen your credit score so you can buy the beautiful Cypress Green home you fell in love with. Here’s how.
What is a FICO Score?
FICO stands for the Fair Isaac Corporation. It was a pioneer in developing a method for calculating credit scores based on information collected by credit reporting agencies. Lenders use FICO scores when deciding whether to offer you a loan. FICO scores range from 300 to 850. The higher your score, the easier it can be to get a loan. FICO scores change as your credit history changes, so it’s worth it to spend time upping your score.
How High Should Your FICO Score Be?
To qualify for a loan, you need a good credit score. How good depends on the type of loan you are applying for and your lender. Scores in the 670 to 739 range are considered good. If you want to qualify for the best interest rates you need a score starting at 740.
If you are a first-time buyer looking at an FHA loan, your score can be as low as 500.
Pay Your Bills on Time
Payment history makes up 35 percent of your credit score. One late payment can have a big impact. A late payment more than 30 days overdue can lower your credit score by as much as 100 points. A missed payment can affect your score for up to 18 months. It can take up to seven years for it to completely fall off your report. Bottom line? Don’t forget to pay your bills. If you are absent-minded, set up automatic payment with your credit card company. You can also set reminders up on your phone or tablet.
Extend Your Credit History
If you are young, you probably don’t have a lengthy credit history. There are some things you can do to beef up that history and let banks know you can be trusted. If you rent, ask your landlord if they report your rental payment history to credit agencies. If not, you can sign up for PayYourRent, a service you use to pay your rent that will report on-time payments to all three major credit bureaus. Experian Boost can also add your rent to your credit history, as well as phone, utility and even streaming bills.
Secured Credit Cards
Another way to boost your credit score is by getting a secured credit card. These cards require a cash deposit to ensure purchases made with the card are paid. The cash deposit is usually equal to your credit limit and made when you open the account. The money is collateral. If you fail to make your payment on time, the credit card lender uses the deposit to reimburse itself. Your payment history is reported to credit agencies, making it a good way to build your credit history.
Lower Existing Debt
If you already owe a lot on your credit cards, make it a point to pay that debt down. Carrying a large balance increases something called the “credit utilization ratio.” This is the amount of credit you’re using compared to your total credit limit. Your credit utilization makes up 30 percent of your FICO score. You want it to be under 30 percent, so pay your debt down. A hack is to ask your credit card company to increase your credit limit. Having more available credit usually puts you under the 30 percent threshold.
Don’t Open or Close Credit Accounts
In general, the length of your credit history makes up about 15 percent of your FICO score. Lenders want to see longevity. That means you shouldn’t close older accounts. You shouldn’t open new accounts, either. It looks like you are planning to take on more debt. If you are planning to purchase a new home in the near future, the only thing you should be doing with your credit cards is paying down existing debt.
Dispute Errors
Credit agencies can make mistakes, so order copies of your credit reports from the three big credit bureaus: Equifax, Experian and TransUnion. Look them over for mistakes such as incorrect balances or credit limits, accounts that don’t belong to you, the same debt listed multiple times and open accounts reported as delinquent. If you notice an error, contact the credit bureau. You can usually file the dispute online. Provide supporting documentation. The agency is required by law to investigate and respond to your claim. Be sure to do this in advance of purchasing a home as any disputes can interfere with your lender approving your loan.
Talk To Your Cypress Green Builder Today
Many builders have preferred lenders who can tell you how your credit stacks up. Check with them to see what type of loan might work best for you. Once you’ve found your perfect loan, it will be time to buy your perfect Cypress Green home.
