How to Improve Your Credit and Prequalify for a Loan
Posted by Eric Skates on
You've found the perfect neighborhood to live. It's a short commute to work, safe, and it has great schools. You are ready to take the plunge and buy a home. But no bank will touch you if you have poor credit. You need to get your credit score in tip-top shape to qualify for a loan. Where do you begin?
How credit scores work
What it is
Your credit score tells lenders how responsible you are with your money. A high score means you are more likely to pay back the loan. A low score indicates you are a higher risk for defaulting on the loan. Most lenders don't loan money to people with low credit scores. If they do it comes with an outrageously high interest rate.
How it's calculated
Most lenders look at your FICO score. It's a number ranging from 300-850. It's the average credit scores from Experian, Transunion, and Equifax. Each credit report looks for specific components to calculate your score.
- Repayment history on your outstanding loans. These loans can be from the bank or credit card repayment.
- Do you have a line of credit or revolving credit? This is where you pay a fee to the bank to borrow money from them. It's different from a typical loan because it's used for day-to-day purposes. Most loans require a specific reason for the money. Like a home equity loan or a mortgage. The amount you take each month from a line of credit can vary too.
- How established are the open accounts?
- What type of accounts to you have?
- How often are you applying for new credit cards, lines of credit, or loans?
Raising your score
The average credit score is around 700. What if your score is nowhere near 700? Not to worry, there are many ways to raise that number.
Pay all your bills on-time
The easiest way to do this is to set up auto-pay. Not all lenders offer this option. Sometimes, it's not a viable option for you either if you aren't paid regularly. You can set reminders each month too. The important thing is to pay the bills on time. It raises your credit score and saves you money. Late fees are money down the drain. They don't help you at all.
Get current on all utilities
If you are not up to date on your bills get your balance to zero. Make sure there is no forwarding balance for utilities like electric, water, or your phone. This will give your FICO score a much-needed boost.
Don't let anything go to collections
After a distressing call from collections, you paid off that bill. You should be fine now, right? Yes and no. You won't get any more calls from the collection's agency. But the account stays on your credit report for seven years. You don't want your ability to get a loan hindered for seven years. If you owe an outstanding debt, ask about a payment plan. Many businesses are willing to accommodate you with this. They just want to be paid back. Ask about this early to avoid being sent to collections.
Don't close unused credit card accounts
At first glance closing unused credit card accounts seems like a great idea. You don't have a balance why not close it? You don't want this extra debt. Having fewer open accounts lowers your score. Pay off that balance in full. Then keep the account open, if there is no fee.
Make sure your credit report is accurate
This may be a painful task but it's important. Go over your all three credit reports with a fine-tooth comb. You can get your report for free once a year. Take advantage of this opportunity. If there are inaccuracies, you need to get those cleared up. You don't want incorrect information lowering your score. You don't need someone else's black marks on your credit history.
If your credit score is less than stellar getting a mortgage can feel impossible. But with these tips, you can chip away at your debts and raise your score. Just because you have a poor credit score now doesn't mean you will forever. Work hard and work smart. You'll be holding the keys to your new home in no time.
If you're ready to prequalify for a home loan, click here now!