There are as many ways to finance your new home purchase as there are homes to choose from; but no matter what option you choose, your credit will play an important part. So what do you need to know about having the best credit possible or improving your credit score?
Assess The Damage
The first step is to know what your credit score is and what is actually on your credit report. There are a variety of online sources that can help you start the process. Credit Karma is a great place to start, it’s free to sign up and pulls your credit information from two of the three credit reporting agencies.
These services may not reflect 100% accuracy when it comes to what score will be used when you apply for financing, but it will show all derogatory and delinquent items that are affecting your score. Understanding what items are holding your score down allows you to being paying off debts on your report and using some other score boosting tools.
It Takes Credit to Get Credit
For some their credit inquiry will find them with no debts to pay off or delinquencies to catch up on – but instead a lack of any credit activity at all. For someone that has no credit history and wants to improve their credit score, there are tools that can help start this process. Anyone with a bank account can walk into their bank and ask to speak to a personal banker about a secured credit card. This type of credit card is secured by cash in your checking account and the limit of the credit card is equal to the amount of cash you use to collateralize the credit being extended. A credit card collateralized by even $500 allows the individual to use the card and pay off the balance at the end of each month and start their credit building journey. After you make the payments on your secured credit card for a few months, and have seen an increase in your score, you can then apply for an unsecured credit card.
Credit Use & Credit Inquiries
The next most important factor determining your score is the amount of your total credit that you use. It’s important to pay down as much of your credit card debt as possible and maintain balances that equal no more than 25% of your total available credit. It’s also important to not close old credit cards that you are no longer using, as this can impact your credit history. What matters is the percentage of credit you use – not how many cards you have open. Lastly, inquiries can negatively affect your score if they are happening frequently throughout the year. If you are credit or loan shopping, keep the inquiries to a short period of time to have the least impact on your score.
Follow these three steps and not only will you improve your score but you may also have greater financing options and lower interest rates for your new home purchase.