Posted almost 5 years ago

5 Steps to Improving your Credit

If you want to buy a home it will not be possible overnight. There are a lot of preparations required before you can even apply for a loan or talk to a lender. Knowing your credit score is the first step to buying a home and understanding your finances. Here are some simple 5 steps to improving your credit rating with the stringent mortgage rules in mind and the need to buy a home.

Step 1. Pull your credit reports and inspect it regularly

According to the Consumer Financial Protection Bureau report, of any given year, less than one in five Americans tend to review their credit report. Before worrying about the credit it is good to begin with understanding and knowing your credit report. This document is important as it is used to calculate your credit score. Thus, it is critical to monitor and update your report at regular intervals and ensure it is accurate. It is easy to get a year’s free copy of your credit report from the TransUnion, Equifax, and Experian - from of each the three credit bureaus.

It is good to review your credit report, months in advance before applying for a home loan, for any probable errors. Even if all the bills have been paid on time, it is advisable to check the credit history for the last two to three months for any discrepancies in the report, says Central Florida Real Estate Fred Franks of Local Realty Service. In case, you have failed to make a few payments on time, it is good to start paying bills on time. This is the best way to repair the credit score, by beginning five to six months in advance.

Step 2. Dispute any errors

Scrutinize every number and data on the reports carefully and dispute any errors you find. For instance, there may be items you have paid for, however, reflect as unpaid or accounts that are not related to you. File the dispute with the authorized agency.

Circle the inaccuracies on the report that need to be corrected, gather evidence to support your findings. Write a detailed letter regarding the errors and send them to the bureaus reporting the faulty information. You may need to wait for the dispute to be processed as it is not a speedy process, however, it will be worth the time as it will reflect a more accurate credit history.

Step 3. Identify the factors that need work on the report

After the credit report is free of discrepancies, review it again to see what can be improved. A credit score is based on the percent of on-time payments, credit card utilization open, negative records, the age of open credit lines, the number of accounts, and hard credit inquiries.

It is good to maintain a good payment history. It is good to keep at least 50 - 30 percent of credit card limit open to utilization. If the utilization rate is low the better it is, know your utilization rate by dividing the total credit card balance by the total credit card limit.

Negative records like foreclosures, tax liens, bankruptcies, accounts in collections, and civil judgments severely damage the credit score, indicating the fact that you have trouble managing credit. Seasoned credit lines or trade lines help in showing a well-managed credit history. The more the number of open credit accounts the better it impresses future lenders. Hard inquiries are for potential lenders to check the score to make a lending decision; many inquiries create a negative impact.

Step 4. Formulate a plan

Once you have identified the points that need to be worked on, set goals. For instance, on time payments are not perfect, identify the reason and solve the issue. If money is the issue, then it is best to look into other ways to make money.

Step 5. Execute the plan well in advance

Improving credit health takes a lot of time and patience and it can fluctuate regardless of efforts to perk it up. The average age of accounts improves with time. It is best to try to keep a check on the credit rating and keep a tab on the progress.

Work diligently towards the goal to improve credit health before buying a home and applying for a loan. A good credit history increases the chances of buying a home while a poor credit score lowers it. It is becoming extremely difficult for loan applicants; with the new mortgage rules, the scrutiny of mortgage applications has increased making it difficult to get a secured.