How to Repair Your Credit
We’ll explain exactly what you need to do to understand and improve your score so you aren’t going into a house hunt with the big credit score question mark. How are scores calculated? And what can you do to improve yours so you’ll always be an easy client for lenders?
Review your report.
The first step is to take a deep breath and pull your credit report. It might be scary, but go through the entire report to be sure there are no errors or inconsistencies. Any payments made on time that show as late, debts you already paid off that are indicated as outstanding, or anything you don’t recognize that could be fraud should immediately be reported so that it can be removed from your report.
What constitutes a good score?
The most commonly used credit scoring methods by the major rating agencies use scores in a range from 300 to 850 with the higher score indicating higher credit rating. The average FICO score, a commonly used credit agency, is a 695. Usually anything below 629 is considered bad credit while anything from 629 to 689 is fair. Over 690 is thought to be good and over 720 is excellent. We usually recommend, as do most lenders, that clients have at least a 620 credit score to obtain a home loan.
How is my score calculated?
You credit score is meant to measure your overall creditworthiness – the likelihood that you will pay off your debts in a timely fashion. One of the major factors in your credit score is your credit-utilization ratio, which is the total amount of credit given to you as it compares to your total credit use. For instance, if you have a $9,000 balance on a credit card with a $10,000 credit limit, your ratio of 90% may result in a lower credit score.
Other factors come into play like number of open accounts, the amount of recent inquiries or applications for new accounts, the number of days you were late paying a bill, and your larger loans like student or car loans. Your score continually changes as your financial situation does.
It’s sometimes difficult to understand how the FICO gods determine your score. We don’t have the exact algorithm, and we’re not sure anyone does. But it’s important to know what factors contribute to your score so that you can make changes to your debt and payment structures accordingly.
How can my credit score affect my decision to purchase a home?
Let’s say you have a poor credit score in the low 500s. You may still be able to get credit, depending on what it is, but it will come at the high cost of huge interest rates and larger deposits. Over 750 and you’ll likely get the best rates and have an easier time acquiring a home loan from a lender.
How can I improve my score?
First thing’s first. Pay down your credit balances. If you have outstanding balances on any of your credit cards or loans, now is the time to pay down your debt. Your total debt compared to your available credit will be a huge determining factor of your score. It’s best to start with the credit cards with the highest total debt to credit ration because any balance over 90% of the card’s limit will be an even bigger red flag for the credit bureau.
Keep accounts open, even if you aren’t using them anymore. It may feel natural to close out and cancel any excess credit cards as soon as you’ve paid them off, especially if they have yearly fees, but you should think twice about this. The age of your accounts is also factored into your credit score. The longer you’ve had accounts open, the more positively this is viewed by the credit bureau.
Pay all your bills, and on time. When you’re in the process of improving your credit score this is the absolute most important time to be sure you’re paying all your bills on time and if you can, more than the minimum payment amount. Any delinquent payments will have a negative impact on your credit score.
Don’t open new accounts if you can avoid it. While you may think opening new accounts or applying for additional credit cards will help with your debt to credit ratio, your credit report will reflect any inquiries that occur when opening a new account. One or two inquiries might not change your score significantly, but If you have an excess amount of recent inquiries your score will go down. Try to focus on paying down debt as opposed to opening more lines of credit to improve your debt to credit ratio.
With a little focus and budgeting, you can pay off significant debt and improve your credit score in no time at all. Take on some extra projects to pay off the debt. Perhaps you can have a garage sale, take on a weekend job, or do some freelance work. Having a high credit score will not only save you money in the long run, but it may be the difference between owning or not owning your next dream home.