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5 Ways To Improve Your Credit Score
As I meet potential clients, the first thing they say to me is "I want to buy, but I need to fix my credit". This is all too common with first time home buyers, so I figured I'd share some of my own life hacks to boosting your credit score!
First, some background info:
To qualify for a home loan, you must meet a minimum credit score. This minimum score may vary depending on the loan product.
What is a credit score?
Your credit score is a number summarizing your credit profile. Two or more credit scores are obtained by a lender when you are starting your home buying process. The credit score used is referred to as your representative credit score, which is the middle of the three or lowest of two.
The minimum credit score needed to qualify is based on the loan product, as well as your debt-to-income ratio and loan-to-value ratio. Please see minimum eligibility scores below:
FHA Purchase Loans: 660+ credit score
VA & RHS Loans: 640+ credit score
Conventional Loans: 640+/680+ depending on your DTI ratio
Now to the good stuff :)
Over the years I've been slightly obsessed with my credit score. Always trying to think of new ways to increase it. I came up with 5 ways to maintain and increase your credit score that are super easy to do.
#1: Automate your savings
You may ask, what does my savings have to do with my credit score? The answer is, ALOT!!! First of all, you have to have money available to be able to pay down your debt. I'm not necessarily recommending that you exhaust your savings to get rid of debt, but you always want to have savings available just in case.
By automating your savings, you are unconsciously putting money away and letting it pile up over time. Set up your direct deposit to have a certain amount go to a savings account each time you get paid. It can be as little as $25 a paycheck. The key is not to touch it once you start. Cut up the bank card for that savings account so you will only be able to access the money by physically going to the bank.
After 3 years, you will have saved $1800 plus any interest if your bank pays it. This may not seem like a lot, but if you really think about it, would you have saved that $1800 if you had to manually put the money away? And if you feel you would like to save more in a shorter period of time, transfer more than $25 from each check.
Let's fast forward to 5 years from now, you have $3000 in the bank. You can either continue to save this money, or you can use it to pay down a high interest credit card, or even use it towards your down payment on a new home.
#2: Pay down high interest credit cards first
If you are wanting to pay down your credit card debt, first determine which cards have the highest interest rates. Most times, store credit cards have higher interest rates than bank provided credit cards. Once you determine which card has the highest interest rate, pay that one off first. An easy way to do this is by making two payments in one month. If your minimum payment is $25 but the interest is $45 a month, you should try to pay $100 a month to this card which breaks down to a $50 payment every two weeks. Once the card is paid off, DO NOT CLOSE THE ACCOUNT. Closing a credit card account can bring your score down. Sometimes having a $0 balance on the card will even affect your score. The goal is to have less than 30% of your card limit on each card. Which brings us to tip #3
#3: Try to keep your credit card balances below 30%
Remember the debt-to-income ratio we talked about, well this is where it comes into play! You may be approved for a $5,000 limit on your credit card, however you want to stay below $1,500. You never want your credit card debt to negatively affect your DTI. Meaning, you do not want to have more credit card debt than what you can afford to pay on a monthly basis based off of your income.
#4: Pay your credit card bills/loans on time
Contrary to popular belief, paying your bills late, have a larger impact on your credit than maxing out a card. If you pay your credit card or loan payment one day late, it is reported to the credit bureau. It also takes longer to recover from late payments. Reason being is the only way to fix it is by exhibiting on time payments. Sometimes you may need to make on time payments for a full year before you are able to recover from missing 2-3 payments. You may notice that in each tip, I recommend making multiple payments each month. I've personally found this very helpful in reducing my debt. It not only allows you to pay down your bills, but you also pay less interest. For example: You get paid every two weeks. You have two major bills (rent, car payment) plus credit cards and student loans. Split your big bills (rent and car payment) between two checks. To be able to do this, you will need to pay a month in advance to get started. Once you do that, each time you get paid, take half of your car payment and half of your rent from your check and put it aside until payment is due again. You will still spend the same amount of money per month, but less every two weeks. Most of us are used to paying rent and car payment from the first check of the month and struggling until we get paid again. This method will eliminate that! Once you start splitting your major bills, you will have money available to make additional small payments on your credit cards!
#5: Check your credit report regularly
Always keep an eye on your credit. It's so easy for someone to steal your identity and ruin all of your hard work. There are a number of third party apps that allow you to monitor your credit report for free. Please keep in mind, that the information may not be 100% accurate, but you will be able to see when something is not right. You can also get your official credit reports once a year from www.annualcreditreport.com
DISCLAIMER: I am not a finance professional. I am simply sharing tips and tricks that have helped me maintain and improve my own credit. As always, please consult a finance professional for detailed information specific to your situation.
Alonna Gordon is a licensed Real Estate Agent based in Maryland. Alonna's background in sales, customer service, marketing and management is a tremendous asset to her clients. She gives constant ener....