These days, it's not unusual for people to discover - too late, in many cases - that their credit rating isn't high enough to get the loan or rate that they're looking for. There are a ton of things that go into calculating your credit scores and while not all of them are necessarily under your control, there are quite a few things that can be done to get that number headed in the right direction. If you've had some challenges with consumer credit in the past and are trying to rehabilitate your rating, or you're just trying to do whatever you can to eke out a few more points to get the best rate, these tips will get you on the right path!
Tip #1: Scour your current credit report for errors
There are three major credit reporting agencies: Equifax, Experian and TransUnion...and you'll want to check the contents of all three reports for anything that doesn't look right, or isn't accurate, and dispute them...and just keep on disputing them, until they are removed! Every consumer is guaranteed by law a free credit report every year, and you can redeem yours at AnnualCreditReport.com. Beware of any other websites offering "free" credit reports - they are likely to make you commit to a monthly charge on your credit card for "credit monitoring" services. I also recommend Credit Karma for free monitoring, but be aware that it isn't always up to date or 100% accurate, so it shouldn't be relied on.
Check every creditor for late payment reports and if they aren't accurate, dispute them. If you see any accounts that don't belong to you, dispute them. Any innaccuracies at all, make sure that you dispute them. This simple step can sometimes cause a giant shift in your credit score, by itself...so it's the first thing you need to do!
Tip #2: Pay your outstanding balances down
Easier said than done, I know...but this can also cause a huge improvement in your score; so it's worth doing, even if it means you have to allocate more money to paying down debt and less toward saving for that down payment. According to FICO, whose score calculations are used by most lenders, about 30% of your score is based directly on how much you owe on your existing lines of credit, and what your "credit utilization" percentage is...how much of your available credit is being used. There are many different opinions on what an ideal credit utilization percentage is, but the consensus seems to be that 30% or less is ideal. So if you have $10,000 in limit on your credit cards, you should try to be carrying a balance of less than $3,000. Keeping that credit utilization low will help move your credit score much higher.
Tip #3: Pay extra every month!
I subscribe to Dave Ramsey's "Debt Snowball" method (and I highly recommend his Financial Peace University classes) when it comes to paying down debt. The basic idea is to pay extra every month on your smallest debt, until it's paid off - then take the total amount you were paying on that debt, and "snowball" it into your extra payment on the next largest debt. You keep doing that until your extra monthly payments are paying down your balances like an avalanche of cash! You will be surprised at how quickly the debt is paid down, using this method. It just requires some self-discipline and budget tightening, to make that extra monthly payment as big as possible.
Tip #4: Ask for credit limit increases
It seems like the opposite of what you want, when you're trying to pay down your debts...but this one goes to the "credit utilization" percentage that we talked about earlier. By getting your balances increased, you're decreasing the amount of credit you are actually using, at any given time. This can be a quick way for someone who is just shy of getting the best rate to push their score over the threshold. Once the new balances are being reported to the credit agencies, you will find that your credit score went up due to your reduced credit utilization.
Tip #5: Open a new credit card account
This is another one that might scare someone who is trying to get their credit under control, but it's a very simple matter to cut that card up as soon as you receive it, and just add the new card's limit to your total available credit. This will reduce your credit utilization percentage and improve your overall score. However, if you already have several lines of credit open and active, I'd avoid trying this strategy - too many lines of credit will make you look like a bad risk. If you don't have many lines of credit, this one can go a long way to increasing your creditworthiness.
Tip #6: Negotiate your outstanding balances
This one isn't that easy, but it's definitely worthwhile and do-able, if you're ready to put in a little legwork. There is a great primer on Dummies.com for how to negotiate a settlement of your debt. This isn't the same thing as filing for bankruptcy, so don't worry about a negative impact on your credit rating. If you find that you just have too much debt to stay ahead of, or a line of credit that's maxed out and a high interest rate that makes it very challenging to pay down, negotiating a settlement can really help a lot. It will require you to pay a lump sum payment, so if you have some savings it could be worth your while to clear some debt at a steep discount, and wipe your slate clean. I always strongly suggest to people that they try to be as debt-free as possible, before taking on a mortgage payment and a home, with all of the random costs that can be associated with home ownership (which many people don't think about, when they're calculating the payment they can afford every month).
Tip #7: Become someone's authorized user
This will require someone to put a lot of trust in you and you will need to assure them that you have no intention of using the card, or line of credit. When you are listed as an "authorized user" on an account, it will be reported as if the line of credit were yours alone. So if you become an authorized user on a line of credit that is used responsibly by someone else, who keeps the balance low and pays it down religiously, over time that good credit behavior is going to start reflecting very well on your own credit report...and you didn't even have to do anything!
All of these tips will help you chip away at that credit score and put yourself in a great position, when you're talking to a lender in the hopes of getting pre-qualified for a mortgage loan. Because of the way credit reporting works, it can take a few months before you start seeing changes...even disputing incorrect information on your report can take up to a month to resolve. This is a marathon, not a sprint...just be diligent, stay disciplined with your finances and focused on your goal of home ownership, and soon enough you will be approved for the best rate possible and on your way to the closing table. I hope to see you there!