There are a number of steps you can take to improve your credit rating before you decide to purchase a home. Financial institutions will look carefuly at your FICO score to determine your credit worthiness.
What is a FICO score?
- This is a review of your credit history that will determine whether you are accepted as a good credit risk by a lender. Scores vary between 300 - to 850, but the average score is near 650. Your credit history, types of credit you have, the number of recent credit inquiries, and your payment history will affect your FICO score.
- Lenders are requiring more stringent guidelines for making loans than in the past, so a favorable FICO score is critical to being approved. This will give the lender some idea of your ability to repay a loan based on your credit history.
Improving your credit score takes time but can mean the difference between obtaining a favorable loan or being turned down. Here are a few tips that may help:
- Check your current credit score - you may find discrepancies or errors. For example, if you have a common name or the same name as a family member, make sure all the errors are removed by contacting the credit bureau and requesting a correction. Checking for errors in advance and getting them corrected may take some time, so take care of these issues before you apply for a loan.
- Make sure you pay on time - any late payments can reduce your FICO score significantly. Lenders want to make sure you can repay a loan and late payments are not a good thing.
- Rotate your credit cards - if you have a fistful of credit cards that you never use, they will count against you. Use them to keep them active, but pay them off promptly.
- Consider applying for a store or gas card - if you have no credit or low credit, retail credit cards are ways to obtain credit and increase your payment history. Be careful to avoid carrying a balance, as they have very high monthly interest rates. Open an account, use it from time to time, and pay it off every month.
All lenders use one of three credit reporting companies to check your credit score - Equifax, Experian, and Transunion. Check Forbes article by Robert Berger on How To Get Your Official FICO Score for Free.
Good credit is your passport to obtaining a favorable mortgage loan!