3 Ways to Improve Your Credit Before You Purchase a Home

By Alex Kowerko, Financial Planning Consultant with COUNTRY Financial

Thinking about purchasing a home in the near future?  If you are, you may want to check your credit score before you get started, as it will be a major factor in determining if you’ll be able to get a loan, and, if you are, what interest rate you’ll qualify for.  Obviously, the better your score, the lower your rate, which in turn reduces your monthly payment and the amount of interest you have to pay over the course of your mortgage loan.  So, it’s no small matter to overlook! 

According to a recent inquiry on Wells Fargo’s Home Lending Rate & Payment Calculator, a ‘Good’ score (700-750) will get you a rate of 4.375%, while a ‘Fair’ score (621-699) comes in at 4.75%.  On a $300,000 home with 20% down, that’s a $54/month difference in your mortgage payment. Now, on the surface it doesn’t seem like much.  However, if you’re on a tighter budget, that could mean the difference in getting that dream home or not. 

Consider the following ways to boost your credit score before you decide to go house hunting:

1. Check your credit report for errors.

Get your hands on a credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion.

Removing errors can be a quick way to improve your score. According to the Federal Trade Commission, about 20% of consumers have an error on their credit report and 25% of those consumers have an error that will significantly affect their score.

Quick Tip: the bureaus must respond within thirty days. So, if you find an error, you’ll want to dispute it right away. Always gather evidence supporting your claim, as this can streamline the process. 

2. Catch-up on past due payments and have a plan to stay current on future payments.

This is a foundational step in improving your score, because it will essentially stop the bleeding. Your payment history has the single biggest influence on credit scores, so if you continue to miss payments, you’ll never have a chance to increase your score.

If you’re behind, contact the creditor to work out a payment arrangement.  Ask the creditor to rescind the reported delinquencies, so they no longer appear.

Quick Tip: sign up for automatic payments or payment reminders to stay on top of future payments.

3. Stay well under your credit limit.

Your credit score considers how much of your credit limit you’re using. This is called utilization and it has a significant impact on your score.  As a general rule of thumb, it's a good idea to keep your total credit utilization rate below 30%.

Obviously, it’s best to pay off debt, but if you’re not able to, consider the following: 

• Ask for a limit increase. When your limit is increased while your balance stays the same, you’re instantly reducing your utilization rate. It’s important to ask for this increase without a “hard” credit inquiry, as this inquiry can drop your score a few points.
• Pay off cards with high utilization. The first reaction is to pay off those big balances. However, it may make more sense to pay off that retail card with a $300 balance on a $400 limit. That 75% utilization rate isn’t doing you any favors.
• Debt consolidation can reduce or eliminate card balances that may in turn reduce your utilization.

As you take these steps, it’s important to note there are quite a few variables that will affect the amount of improvement you are able to make to your credit score, and the time frame in which you are able to do so. For example, those starting with lower scores will have an easier path to seeing significant improvements since there is more upside. In other words, it’s easier to improve from fair to good, than from good to excellent. 

In addition, blemishes on your credit report have varying degrees of staying power. For example, it’s much easier to recover from minor mistakes such as a missed payment (18-month average recovery) or maxing out your credit card spending limit (3-month average recovery). It takes much longer for more serious issues such as a bankruptcy that could take up to six years on average.

For more information on this COUNTRY Financial survey, and related surveys, visit www.countryfinancial.com/newsroom.