5 Hacks to Boost Your Credit Score Before Buying Your First Home
Attractive mortgage offers go to those with the strongest credit scores. Here's how to give your score a boost before applying for a mortgage.
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When you buy your first home, you have three goals: Find a house you like, agree on a fair price, and land a great interest rate. The interest rate you end up with will depend, in large part, on your credit score. Whether your credit score is currently in the basement or just a bit lower than you would prefer, here are some great hacks to help you elevate it.
1. Review your credit reports
One of the first rules of personal finance is to always know where you stand, credit wise. The easiest way to get a free credit report from the big three credit reporting agencies is to place an order through AnnualCreditReport.com. Once you have them, review each with a fine-toothed comb, looking for any possible mistakes. They may be something huge, like showing that you still owe money on a car you paid off years ago, or they may be something small, like saying you live somewhere you don't.
When you find an error, circle it. Once you're done with each report, dispute any mistakes with the credit reporting agency in question. For example, if the mistake is on your Equifax report, dispute it through the Equifax website.
If the credit bureau approves your dispute, you should see the error corrected within 30 days. Even a seemingly small mistake can lower your credit score, and getting it off your credit report is a good way to give your score a small boost.
2. Get caught up
Sticking with a budget month after month can be a challenge, and it's easy to fall behind on bills. However, any time you fall behind on a bill, it's reported to the credit reporting agencies and shows up on your credit report (dragging down your credit score). One of the first things you should do is to focus on getting caught up on bills that have fallen behind.
3. Limit credit applications
Since the goal is to score the lowest mortgage rate possible, you'll want to apply for credit only when necessary -- especially in the months leading up to house hunting. Lenders get nervous when they see someone borrowing money haphazardly.
Let's say you receive an advertisement for a credit card. All you have to do is apply. If you don't need another credit card, do not apply. The same is true for borrowing money from any other source. Avoid applying for an auto loan, personal loan, or any other consumer loan before applying for a mortgage.
It's not just that it looks good to lenders. Applying for too much credit in too short a period lowers your credit score.
4. Request a credit limit increase
Rather than applying for new credit, ask a current creditor to raise your credit limit. Here's why: Credit utilization counts for 30% of your total FICO® Score, the credit score most frequently used by U.S. lenders.
Credit utilization is a snapshot of how much credit you have available compared to how much you use. Let's say you have a credit card with a spending limit of $10,000. Financial experts recommend that you keep your utilization under 30%. That means you never want to spend more than $3,000 ($10,000 x 0.30 = $3,000). Once that $3,000 is paid off, you can spend another $3,000.
In short, lenders want to know that you're credit-worthy enough to get credit but careful enough to only use a little of it. Asking for a credit limit increase on an existing credit card or loan automatically lowers your utilization ratio -- as long as you don't spend money to take advantage of the new, higher limit.
5. Do not close old credit card accounts
If you've ever had a problem with credit card debt, you know how tempting it can be to cut cards up and close accounts. While putting them out of reach is a good idea, do not close out old cards. Doing so will not only impact your credit utilization (because you'll have less available credit), but it will also damage the length of credit history portion of your credit score. FICO says how long you've had access to credit counts for 15% of your total score. Getting rid of available credit will only hurt your credit score.
If you're excited about buying a home but aren't sure you're up to snuff on personal finances, there are some great, easy-to-follow financial literacy apps that walk you through the basics. After all, the more you know, the more confident you will be as a first-time home buyer.
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