How to Fix Your Credit to Buy a House
Contents
- Check your credit report for errors
- Pay your bills on time
- Pay off debt and keep balances low on credit cards and other ‘revolving credit.’
- Avoid opening too many new credit cards at once
- Do not close unused credit cards as a short-term strategy to raise your scores
- Dispute credit report errors with the credit bureau
- Keep old accounts open and active
- Consider a secured credit card
- Become an authorized user on a family member or friend’s credit card
- Get a credit-builder loan
Find out how to fix your credit so you can buy the house you’ve always wanted.
Bad credit can be a major obstacle to homeownership. If your credit is less than perfect, it’s important to take steps to improve your credit rating before you apply for a mortgage. This will give you the best chance of getting approved for a loan with a favorable interest rate.
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Check your credit report for errors
The first step is to order copies of your credit reports from the three major credit bureaus: Experian, TransUnion and Equifax. You’re entitled to one free report from each bureau every year. Check them carefully for any errors, such as incorrect accounts, late payments that you actually made on time or accounts that don’t belong to you. If you find any errors, file a dispute with the credit bureau.
Pay your bills on time
One of the biggest factors in your credit score is whether you pay your bills on time. So, if you’re hoping to buy a house soon and your credit score needs a little boost, make sure you’re paying all your bills on time — including your rent or mortgage, car payments, credit card bills, and utilities. If you have any trouble doing this, set up automatic bill pay so you can be sure your bills are always paid on time.
Pay off debt and keep balances low on credit cards and other ‘revolving credit.’
One of the most important things you can do when trying to improve your credit score is to pay off debt and keep balances low on credit cards and other “revolving credit.” Payment history and amounts owed are two of the most important factors in credit scoring, so by keeping balances low and making timely payments, you can give your score a boost.
Avoid opening too many new credit cards at once
Credit repair takes time and effort, but if you’re diligent, you can see results. In the meantime, here are some things you can do to help improve your credit so you can qualify for a mortgage:
-Avoid opening too many new credit cards at once. Each new account lowers your average credit history, which can drag down your score.
-Keeping your balances low relative to your credit limits will also help improve your credit score. So if you have the opportunity to open a new account with a high limit, do it!
-Pay all of your bills on time, every time. This includes both monthly payments (like your rent or mortgage) and more frequent payments (like your utility bills).
-If you have any outstanding debt, work on paying it down. The lower your overall debt load, the better off your credit score will be.
Do not close unused credit cards as a short-term strategy to raise your scores
It may be tempting to close your credit cards if you’re trying to raise your credit scores in a hurry. After all, having fewer accounts open should, in theory, mean less opportunity for you to make a mistake and damage your credit.
But in the short term, closing unused credit cards could actually do more harm than good. That’s because one of the key factors in credit scoring is your “credit utilization ratio” — the portion of your available credit that you’re actually using at any given time.
Say you have two credit cards, each with a $1,000 limit. One of those cards has a balance of $500, while the other is completely unused. Your overall credit utilization ratio is 25%. But if you close the unused card, suddenly your credit utilisation ratio on the remaining card leaps to 50%. And that could ding your score, at least temporarily.
Dispute credit report errors with the credit bureau
If you find errors on your credit report, you can dispute them with the credit bureau. To do this, you will need to send a written dispute letter to the credit bureau that includes the following information:
-Your name, address, and phone number
-A list of the errors you are disputing
-The reasons why you are disputing each error
– copies of any supporting documentation.
The credit bureau is required to investigate your dispute and respond within 30 days. If they find that the information on your report is inaccurate, they will correct it and send you an updated copy of your report.
Keep old accounts open and active
One factor that affects your credit score is the length of your credit history. So, if you have old accounts that you haven’t used in a while, keeping them open and active could improve your credit score.
Another factor that’s considered is your “credit utilization ratio.” This is the amount of debt you have compared to the amount of credit you have available. So, if you close an old account that has a $0 balance, you may actually hurt your credit utilization ratio and your credit score.
Consider a secured credit card
A secured credit card is a credit card that requires a cash deposit as collateral. The deposit is usually equal to your credit limit. For example, if you have a $500 deposit, you may have a $500 credit limit. This type of card allows you to build or rebuild your credit because it reports to the major credit bureaus (Experian, TransUnion and Equifax).
Remember, when using a secured credit card, it’s important to make all your payments on time and keep your balance low. This will help improve your credit score so you can eventually qualify for an unsecured card with better terms.
There are a few ways to become an authorized user on a credit card. The most common is to be related to the primary cardholder, usually as a spouse, child, or other family member. You can also become an authorized user through a close relationship with the primary cardholder, such as a partner in a business venture. And finally, some companies offer authorized user status to people who have a close relationship with the company, such as top customers or employees.
Once you’re an authorized user, you’ll have access to the credit card account and will be able to use it just like the primary cardholder. This can be helpful if you’re trying to build or improve your credit history and score. When the account is managed responsibly by the primary cardholder—meaning payments are made on time and the balance is kept low relative to the credit limit—it will reflect positively on your credit report and help boost your score.
Get a credit-builder loan
A credit-builder loan is a type of loan that helps you build or improve your credit score. With a credit-builder loan, you borrow a small amount of money and agree to make regular payments over a set period of time. The lender reports your payment history to the credit bureaus, which can help improve your credit score.
There are two types of credit-builder loans: secured and unsecured. A secured loan requires you to put down collateral, such as a savings account, CD, or piece of jewelry, to secure the loan. An unsecured loan doesn’t require collateral but may have higher interest rates and fees.
If you have bad credit or no credit, a credit-builder loan can be a good way to improve your credit scores so you can qualify for a traditional mortgage.
