Improving Your Credit Score

As you approach the purchase of a home, securing financing is a major consideration. The best interest rates are available to buyers with good credit scores. How can you ensure that you will be considered a prime candidate for a home loan?

Your creditor rating is called a FICO score and this basic system of judging credit worthiness is used by all three of the major credit bureaus-Equifax, Experian and TransUnion. A score above 680 makes you an excellent candidate for credit and you are likely to get the lowest loan rates possible as lenders compete for your business. Scores between 550 and 680 can secure financing, but usually at higher rates. Anything around 500 and below means you have your work cut out for you-start improving your credit!

The first step is to make certain that you have no errors in your credit report. All three of the big credit bureaus allow individual consumers to purchase their credit report, but only Equifax gives you an actual FICO score. If you were recently denied credit, you may request a free copy of your report from the bureaus involved in your credit application.

Any credit card or loan that you have every carried will appear on your report. If you notice a credit line that you never applied for or incorrect information, such as an account that has multiple late payments or which was “charged off” (e.g., closed by a creditor as a loan that was never repaid) you need to take steps to correct that report. Perhaps you were a victim of identity theft or a simple clerical error. Examine your report at least six months before you intend to apply for a large loan so that you have time to fix any mistakes.

Pay your bills on time! Typically, a late payment is one that is over a month delayed. Pile up too many unpaid bills and your credit score will suffer. Agencies take this as a sign that you are already overextended and not a good candidate for more credit.

Reduce your credit card balances. Your total amount of credit available and your loan balance should not exceed 25 percent if you want to have a good credit score. Most loan specialists recommend that you cancel credit cards you do not need or use, however, if doing so could raise your overall balance percentage, you may want to keep them to improve your credit rating. It is best, however, to not carry a credit card balance at all or to pay off your unsecured credit card debt with a secured home equity loan. That guarantees a better credit score and solidifies the value of canceling unused or unwanted credit cards.

Stability helps your credit score. If you have lived at the same address or worked for the same company for more than three years, your value as a loan applicant increases. While a lower rental price may be a temptation, if you know you plan on taking out a big loan for a house, work to keep the same address for three years minimum. If you have to move, do not plan to apply for new credit for at least six months in order to avoid rejection.

If you do have to declare bankruptcy, or have a horrible credit rating, strive to keep at least one of your creditors happy. This will help your credit score. Be cautious of agencies that guarantee to solve your credit problems. They will sometimes negotiate for you with your creditors, telling them that you are not able to pay your loan balance unless they lower the amount due or the interest rate. This is a short-term tactic that may hurt your credit score over the long-term.

Additional information on loans and credit scores can be obtained from free consumer websites (such as www.debtwizards.com). While the advice they offer is without cost, some of the services they recommend are not. Savings are certain, however, if you work to improve your credit score.