Before you even begin looking for a new home to buy, you need to make sure your credit is good condition, and get a pre-approval letter. Further, you have to understand how to maintain your credit score through to closing on your home loan. Here is a list of recommendations on how to get and maintain a credit score to get the best interest rate on your loan.
Pay Your Bills on Time – All the Time, or Early, Every Month
Paying your bills on time each month is the single most important thing you can do to increase your credit scores. 35% of your score is based on your history of paying bills!
Credit Cards: Lower Balances Are Better
The second largest factor determining your score is your ratio between available credit and used credit. The higher your credit limits, and the lower the amount you owe on that limit, the better your credit score. Therefore keep your outstanding balances on your cards well below your maximum credit limit.
No More Than Three Cards
Some people have 5, 10 or more credit cards. The credit agencies interpret this as a lack of restraint and control. They prefer to see no more than 3 cards with low rates.
Diversity is Good
People that have credit scores above 750 have a few things in common. First, they’ve had credit for a few years. Second, they keep their credit balances low. Finally, they have different types of loans beyond credit cards.
Having a mix of credit card loans, installment loans, and even student loans that are all paid on time shows the lender that you are a good risk. Installment loans are usually for large purchases such as a car, boat, or a home.
Keep the Good Stuff Right Where it is
Too many people make the mistake of paying off old debts, such as old credit cards, and then closing the account. This is actually a bad idea. Part of your score is based on the length of time you have had credit. A couple of credit cards with a long history of on time payments and low balances help improve your scores. Similarly, if you have been paying on a car or motorcycle for a long time, do not be in a hurry to pay off the balance. Continue to make the payments like clockwork each month.
Stop Filling out Credit Applications
Multiple credit inquiries in a short amount of time can really hurt your credit scores. Lenders view the various inquiries as someone that is desperate and possibly on the verge of making a bad financial choice. If you currently have 2 or 3 credit cards along with either a car loan or a student loan, don’t apply for any more debt. Make sure the payments on your current debt are all up to date and focus on paying them all down.
Develop a Sound Budget
This one tip will help you with nearly all the tips before it.
A lot of people try to buy a home without a firm handle on their finances. This causes people to go into debt when the roof needs replacing, the water heater breaks, or when any number of other repairs occurs. The new debt, usually in the form of credit cards and small, unsecured loans, becomes a burden. Now the new homeowners are faced with trying to work more hours, get a 2nd job, or risk losing their home. All of that can be avoided with a well-designed budget and a commitment to stick to a plan.
Do some research online and find a good budget model that you can follow. Maybe you are the type of person to sit down at the beginning of the month and plan all of your payments based on due dates. Or maybe you prefer to do a little bit of work during the month to keep everything in line. Several online platforms can actually help you plan a budget based on your checking account history and help you stay on track with email reminders.
Regardless of the system, you need to have a plan that covers at least the following items:
- Enough money to cover your current bills
- Food, clothes, and a little splurging
- Retirement savings
- Savings for emergency
- Savings for a home purchase
A well thought out plan can save you years of frustration and regret.
If you would like additional information on how to get and maintain a credit score to get the best interest rate, or you have any other real estate questions, please feel free to contact me at 614-395-1776 or firstname.lastname@example.org!