While you certainly don’t need a perfect credit score to apply for and ultimately secure a home loan, it’s always best to have a credit score that’s as high as possible when you decide to go house hunting. After all, a higher credit score always improves your chances of getting a loan. It also puts you in a better position to land a more favorable interest rate once your loan has been approved.
Following are five practical ways to build your credit score so you don’t have to sweat the possibility of poor credit standing between you and the home of your dreams.
1. Pay all your bills on time
This seems like common sense, right? Of course, one key here is understanding which bills affect your credit and which ones don’t. For example, making your car payment on time can have a huge impact on your credit score. However, paying your cable and/or utility bill on time isn’t typically going to do anything for your credit since most utility and cable companies don’t report to credit bureaus. The best course of action, though, is to pay ALL of your bills on time. Even utility or cable bills can pop up on your credit history if you’ve missed enough payments to default on your account.
We recommend simply consolidating a few of your monthly bills on a credit card and then always paying that credit card on time each month. This WILL build your credit score quickly, and you’ll be glad you did it.
2. Focus on credit card utilization percentage
In the simplest terms, credit card utilization percentage is the amount you owe on your credit card divided by your card’s credit limit. For example, with a $10,000 credit limit and a balance of $5,000 on a card, your credit utilization percentage would be 50%. In other words, you’re using half of the total credit available.
Credit scoring models often consider credit card utilization percentage when calculating your credit score. In fact, credit card utilization percentage can impact up to 30% of your credit score, so it’s very important! A low credit utilization percentage means you’re using less of your available credit. Credit scoring models generally interpret this to mean you’re doing a good job managing credit by not overspending. Keeping your spending in check builds your credit score.
3. Reduce debt-to-income ratio
Debt-to-income ratio, or DTI, is the percentage of your monthly gross income that goes toward paying debts. Generally speaking, mortgage lenders prefer that borrowers have a debt-to-income radio of less than 36%. However, the smaller the percentage, the better. While the amount of money you make doesn’t directly affect your credit score, many lenders consider DTI when deciding to offer you credit. This is because DTI is considered an indicator of whether you’ll be able to repay a loan. With low DTI, you’re deemed more likely to make your monthly mortgage payments.
4. Check credit reports and dispute errors
The three main credit bureaus — Equifax, Experian, and TransUnion — send your free credit report once a year. To access, simply order online through annualcreditreport.com. It’s a good idea to carefully review these reports, especially if you’re thinking of making a home purchase any time soon. If you notice mistakes, dispute them. Otherwise, they will negatively impact your credit score — and your ability to qualify for a home loan. Credit bureaus have 30 days to investigate and respond, so it’s a good idea not to waste time in checking these.
5. Allow time between loans and don’t make big purchases before applying for a loan
Making a major purchase (think boat, vehicle, etc.) or applying for another loan is never a good idea when you’re considering a home purchase. To build your credit score, it’s better to simply wait before applying for another loan or making a big purchase. If you have another loan, try to pay it off or at least liquidate as much of it as possible. Don’t let your credit and your ability buy a home suffer because of a poorly timed loan or purchase.
An imperfect credit score is no reason to panic, even if you’re thinking about going home shopping in the not-too-distant future. Just ask your Fairway loan officer about our internal Creditool team of highly qualified credit analysts. We’ll assign someone to your credit report and draft a credit improvement action plan just for you, free of charge.
Let Fairway of the Carolinas pilot your home loan and guide you along the path to better credit. We’re always available to answer any questions you have. Feel free to call or ask questions in the comments section below.