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How to Improve Your Credit Score Before You Buy

by Kimberly Fischer
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The state of the market right now is anything but certain but there are still opportunities for savvy buyers on the hunt for a new home. Getting your finances and documents in order is paramount if you want to secure the home of your dreams, as you may have to move quickly to beat the competition.

So what things do we recommend doing to prepare? Improving your credit score is right up there on our list. This is one of the most important factors taken into consideration by home mortgage lenders. An excellent credit score allows you to take advantage of current low interest rates, saving you thousands of dollars in interest over the life of your loan.

According to online financial services marketplace LendingTree, even raising a fair score (580-669) to a very good score (740-799) can save you $29,106 in interest payments on a 30-year fixed home mortgage of $234,437. That’s certainly a decent chunk of cash!

Improving your credit score before you buy or sell isn’t that difficult to do, and we’ve got some easy tips you can follow below.

Why Is A Good Credit Score Important? 

Your credit score directly affects the amount of money you’ll be able to borrow. This is important, especially if you’re planning to move to a bigger house or a better location. You’ll want to maximize your borrowing power as much as you can.

A healthy credit score, of very good (740-799) or exceptional (800+), indicates to lenders that you can be trusted with more money, because you’ve demonstrated that you can pay back what you borrow.

A credit score in the healthy range will also give you the pick of low-interest rates, this is the golden ticket you’re really striving for! It’s up to specific lenders what score they use to offer low-interest rates but even a few extra points on your score can make a substantial difference to your monthly payments.

5 Steps to Take to Improve Your Credit Score

Understanding the factors that influence your credit score is a smart move as you can then take steps to improve it. According to FICO, these are the factors that go into making up a credit score:

  • payment history (35%)
  • amounts owed (30%)
  • length of credit history (15%)
  • new credit (10%) and
  • credit mix (10%).

Improving your credit score isn’t an overnight exercise, it can take a month or two, but it’s well worth doing as you can save a lot of money. Here are 5 steps you can take to start improving your credit score right now.

1. Check for errors on credit report

Mistakes and inaccuracies on credit reports are more common than you might think. A government study found that 5% of homeowners were paying higher interest rates because of mistakes on their credit report.

Common mistakes include:

  • Duplicate accounts
  • Incorrect accounts
  • Fraudulent accounts
  • Incorrect payment statuses
  • Outdated information.

Even if you think you have a good credit score, you should check it to make sure the information is correct. You can request one free annual copy of your credit report from the three major credit bureaus: Equifax, Experian, and TransUnion through AnnualCreditReport.com.

If you find an error or inaccuracy you can lodge a free formal dispute with a single bureau, or all of them if it’s on all three reports. Instructions for filing disputes and the information you need to supply can be found on the respective websites. It takes around a month for dispute resolutions to be processed and a bit longer for your report to be updated.

2. Pay off debt owed and credit mix

The amount of credit you have and how much of it you’ve used (known as ‘credit utilization’) makes up 30% of your credit score. If you have a high amount of debt, over 25% of your available credit, then aim to get it down to less than 10%. It will really boost your score.

Paying off debt is a positive move, but having a mix of credit to your name can also help increase your points. Having a few different types of loans, and repaying them responsibly, suggests you may be less risky than those with only one type of credit. But at 10%, this is not a key aspect of your score. It’s better to show you can pay off one loan than open up a bunch of new credit cards, which can actually hurt your score.

3. Pay bills on time

If you think it’s alright to pay a bill late, even a library fine, think again. Your payment history accounts for 35% of your credit score, and a payment that’s over 30 days late can knock 100 points off your score. That’s huge!

If an unpaid bill goes into debt collection that’s even worse as it can stay on your credit report for seven years. Set up automatic payments or a calendar reminder to pay bills on time. If a bill is overlooked, as long as you pay in full within 30 days it won’t affect your score but you may have to pay a late fee.

4. Minimize credit card spending

In the months leading up to applying for a home mortgage, concentrate on paying off the majority of your credit card debt and also keep balances low. When going through the mortgage application process it’s advantageous to pay off your credit card weekly, rather than on the due date. You don’t know exactly when a lender will pull your credit report to get a snapshot of your account balances.

It’s also a good idea to use any sale proceeds from your home to pay down existing credit card debt to boost your credit score before applying for a home mortgage.

5. Think before opening new credit

New credit makes up 10% of your credit score but only if you don’t have much of a credit history to start with. A lot of new credit inquiries in a short space of time are a red flag to lenders that you’re too reliant on credit and it can lower your score, something you don’t want before applying for a home loan. So hold off on taking out large personal loans or applying for new credit cards, even if the bonuses or rewards are tempting.

Remember, you’re looking to give yourself the best chance of success when you sell your home and buy another. So be sure to check your credit score and follow our tips to boost it as much as possible over the coming months. That way you’ll be in a much stronger position for borrowing and for taking advantage of low interest rates.

If you’re ready to sell, get in touch with REX. We look forward to marketing your property and achieving the best price possible, so you can afford the home of your dreams!

Interested in buying or selling a home? We would love to help!

Give us a call at 855-205-0599

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