Improving your credit score is a relatively simple process, but it may take some time and effort. The most effective way to improve your credit score is to pay down your balances and make all your payments on time each month.
If you need to increase your credit score quickly in order to buy a home, there are a few steps you can take: paying off as much of your credit card debt as possible, making all your payments on time, keeping your credit utilization low, and possibly considering a credit-builder loan. It is important to note that you do not need excellent credit to buy a home, only qualifying credit.
This article provides more information about how credit scores work, what factors influence your credit score, and how to improve your score to buy a home.
How Are Credit Scores Calculated?
Credit scores are used by businesses to assess the likelihood that a borrower will make timely payments. In the mortgage industry, credit scores are used to predict the probability that a homeowner will make on-time payments to a lender over the next 90 days. This is important because after 90 days of non-payment, lenders have the right to repossess a home through a legal process called foreclosure. Credit scores for mortgages range from 300 to 850, with a score of 300 indicating the highest risk of non-payment and a score of 850 indicating the lowest risk. Lenders typically classify credit scores into the following categories: excellent (740 or higher), good (680-739), average (580-679), below average (500-579), and poor (below 500). To qualify for a mortgage, home buyers must have a credit score of at least 500.
What Goes Into A Credit Score?
A credit score is calculated using more than 50 different inputs, which are grouped into five categories: payment history, borrowing habits, track record, recent attempts to secure credit, and experience with different credit types. The credit score formula assigns different weights to each category, with a greater emphasis on more recent events. Therefore, the best way to improve your credit rating is to start practicing good credit habits today and be patient.
Within six months, you can expect to see significant improvements in your credit score. It’s important to note that certain personal characteristics, such as age, gender, race, religion, national origin, marital status, political affiliation, medical history, criminal record, receipt of public assistance, salary, employer, and job history, do not affect credit scores. Credit scores are based solely on merit, and anyone can achieve a perfect credit score by following good credit habits.
7 Ways to Fix Your Credit Score Within 6 Months
There are three main credit bureaus in the United States: Experian, TransUnion, and Equifax. Each bureau has its own proprietary credit score formula with slight variations in the way it weighs different factors. While the exact details of these formulas are not publicly disclosed, it is possible to understand what makes a credit score strong and how to improve it by examining patent applications and other public information. If you are looking to improve your credit score in order to buy a home, there are several actions you can take. Here are seven steps to consider:
Get Current With Your Bills.
Payment history, which includes your track record of paying back creditors such as lenders, lessors, and credit card companies, accounts for 35% of your credit score. On-time payments are the best, while an occasional 30-day late payment will only cause minimal damage. However, payments that are 60 days late or longer, or bills that have gone into collection, can have a more significant negative impact on your credit score.
To improve your payment history, try to get current on your bills and then continue making on-time payments each month. After three months, you should start to see an improvement in your credit score. After six months, your score should recover almost fully. If you need to prioritize your payments, focus on making the minimum payments for your credit card, auto loans, and student loans first, and then pay off your entire credit card balance and other bills.
Increase Your Credit Limits And Lower Your Credit Balances.
The amount you owe, which is the amount of credit you are using compared to the amount of credit that is available to you, accounts for 30% of your credit score. The credit bureaus prefer consumers who use less than one-third of their available credit, and credit utilization over 50% can negatively affect your score. To improve your credit utilization, try paying down the balances on your individual credit cards until you are using less than one-third of your available credit limit on each card. Then, call your credit card issuers and request an increase to your credit limit. When asked, decline the option to have your credit score checked as part of the increase process and accept whatever new limit is offered.
Avoid Opening New Credit Card And Loan Accounts.
New credit, which includes the new accounts that are opened in your name or by others, accounts for 10% of your credit score. This can include auto loans and leases, student loan refinances, and credit cards, as well as store charge cards. The credit bureaus consider new credit negatively because it can decrease a person’s ability to pay other bills. To improve your credit score, try not to apply for new credit using your social security number in the months leading up to purchasing a home. Pre-approvals, which are accepted as part of the home-buying process, generally have minimal impact on your score. New credit and store charge cards can be harmful to your credit score.
Maintain Your Existing Credit Accounts
The diversity of your credit accounts, known as your consumer credit mix, makes up 10% of your credit score.
Your consumer credit mix refers to the various types of credit accounts that make up your credit history, such as mortgages, auto loans, student loans, personal loans, and credit cards. Credit bureaus use your consumer credit mix to understand how you manage different account types as part of your overall credit profile. By keeping your existing credit accounts open, you can naturally maintain a healthy credit mix.
Once you’ve reduced a credit card balance to $0, don’t close the account. Instead, keep the credit line open and use it for small purchases each month. Make sure to pay the bill in full when it arrives. This shows creditors that you are borrowing money and paying it back on time, which is better than closing the account or opening new accounts. Using as little as $5 per month can help you achieve this.
Fix Your Credit Report Errors
Correcting errors on your credit report can significantly improve your credit score. According to a study by Consumer Reports, about one-third of US consumers have errors on their credit reports that harm their credit scores. These errors can be caused by identity theft or mistakes such as a credit card company not reporting your credit limit accurately, a paid-off student loan appearing as active, or a charge card reporting a late payment in error.
You may also find that your credit report has been merged with someone else’s due to similar names or social security numbers. To fix these errors, you can request a copy of your credit report when your mortgage is pre-approved, which will not affect your credit score. This will allow you to review the information and make any necessary corrections. Many errors can be easily corrected online.
Use a Credit Builder Tool
Using a credit building tool can help you improve your credit score and credit report. These tools often work by increasing the positive payment history on your credit report and helping you build up savings.
One such tool is StellarFi, which automatically pays and reports all recurring bills through its platform to the three major credit bureaus (Experian, TransUnion, and Equifax). There are no deposits, credit checks, or interest payments required to use this service. By using a credit building tool like StellarFi, you can gain control over your credit score and reporting.
Your credit history, or the length of time you have managed your credit accounts, plays a significant role in your credit score, accounting for 15% of the total. Credit scores are typically higher for individuals with longer credit histories, as they provide more information and can be more predictive of future behavior.
However, those with shorter credit histories may struggle to earn high credit scores due to a lack of a track record. To improve your credit history and boost your credit score, you can try to leave your older credit accounts open, even after you’ve paid them off, and make small purchases on them at least once a month. This can help you establish a longer credit history and improve your credit score over time.
What Is The Minimum Credit Score Required To Purchase A Home?
A credit score of 500 is the minimum required to buy a home and obtain a mortgage. However, as a buyer’s credit score increases, they may have more options for borrowing. According to official mortgage guidelines, the minimum credit scores for government-backed loans are:
- Conventional mortgage: 620
- FHA mortgage: 500
- VA mortgage: 580
- USDA mortgage: 580
Approximately 98% of first-time home buyers use government financing, which typically has a lower credit score requirement than jumbo loans or other non-government loans. However, these non-government loans may not have a published minimum credit score requirement. It is generally expected that jumbo loans will require a higher credit score than government-backed loans.
How Long Does it Take to Build Credit to Buy a House?
It is possible for home buyers to improve their credit scores and become eligible for a mortgage in as little as six months. However, the length of time it takes to rebuild credit can vary depending on factors such as a person’s credit history, the age of their accounts, and the mix of credit types they have.
It is also important to note that while some credit issues, such as judgments, liens, or major delinquencies, may make it more difficult to repair credit, it is still possible to do so. People with multiple trade lines, or credit accounts, may see their credit improve more quickly, while those with less credit experience may take a little longer. In general, it is possible to rebuild credit and become eligible for a mortgage within two years.
Unlock the Power of a Perfect Credit Score: Tips for Boosting Your Rating and Reaping the Rewards
Having a high credit score is important when purchasing a home, as it can give you access to a wider range of mortgage products and lower interest rates. This can allow you to purchase a larger home and have a more affordable monthly payment. It is a good idea to start planning for credit early and use time to your advantage. As part of the mortgage pre-approval process, you will receive a copy of your credit report. Be sure to review the information and make any necessary changes to improve your score.