Six Ways to Improve your Credit Before Purchasing a Home

As the leaves turn colors and autumn brings vibrant images into focus, it’s the perfect season to find contentment at home. If your house or apartment isn’t feeling like home, then perhaps like the season, you are ready for your own big change. If so, a recent COUNTRY Financial survey shows you join 26% of Illinoisans with a home purchase on your Christmas list this year. Whether your purchase will be sooner or later, it’s not too early to focus on bringing some new colors to your credit score.

As we looked at bank rates this spring, a “Good” score (700-750) provided a rate of 4.375%, while a “Fair” score (621-699) came in at 4.75%. On a $300,000 home with 20% down, that’s a $54 per month difference in your mortgage payment. That may not seem like much. However, with 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 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 quickly 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.

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. Payment history has the single biggest influence on credit scores. If you’re continuing to miss payments, you’ll never have a chance at increasing 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.

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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 rule of thumb, your utilization rate should be below 30%. This would apply to your overall debt, as well as on a per debt basis.

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

4.  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.

5.  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.

6. Consolidate debt.

It can reduce or eliminate card balances that may in turn reduce your utilization.

As you take these steps, note that quite a few variables will affect the amount of improvement you are able to make 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 available.

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In addition, blemishes on your credit report have varying degrees of staying power. It’s much easier to recover from minor mistakes such as a missed payment (18-month average recovery). It takes much longer for more serious issues such as a bankruptcy, which takes up to six years on average.

About the Author: Alex Kowerko is a Certified Financial Planner™ and Financial Planning Consultant with COUNTRY Financial.