Your credit score can have a big impact on your ability to get a home loan. Higher scores can also mean better interest rates and loan terms, and that can save you a lot of money in the long run.
What’s encouraging is that your credit score isn’t set in stone. There are steps you can take to help improve your score, from changing the way you use credit to paying old debts and even fixing errors on your credit report.
The challenge for a lot of people is knowing where and how to begin.
Here are some key tips for building and boosting your credit score.
Each bill is your opportunity to tell a future lender what kind of borrower you are. Make the most of each of those opportunities. Pay your bills on time, and don’t take on more debt than you can handle.
Be careful with excessive credit inquiries. Shopping around for credit cards or other types of loans is important, but hard inquiries can ding your credit score and be an indicator of risk, especially if you don’t have a strong credit profile. There’s a difference between comparison shopping and trying to rack up a bunch of new credit, and credit scoring formulas (and lenders) can’t always tell the difference. FICO does allow for mortgage rate shopping within a 45-day window, meaning you can seek preapproval from multiple lenders without having each credit inquiry count against you.
Another tip for responsible credit use: Don’t co-sign on a loan with a friend or relative. Co-signing on a loan puts your financial future on the line. If your co-signer makes a late payment or goes into default, your credit score takes the same hit. Keep your credit in your control. Don’t share your credit with anyone.
Handle all of your bills responsibly to maximize your credit score and your financial options.
You want to keep the balances on your credit cards relatively low, preferably 30 percent or less of your card’s limit. You also want to keep your cumulative spending below 30 percent of your entire credit limit. So that’s either no more than $300 on a $1,000 credit limit or a $3,000 on a total credit limit of $10,000 spread across multiple cards.
Keeping big balances on your cards can drag down your score. For consumers who don’t use credit cards, getting one or two may actually help improve their credit score, provided they use it wisely.
The length of your credit history plays an important role in your overall score. A more seasoned track record can help bolster your credit score. Even if you’re no longer using older credit card accounts, don’t close them out. Instead, keep them open and allow them to age.
Judgments, tax liens and federal debts may have to be paid in full before you can close on a mortgage. You may be able to move forward on a loan after establishing a repayment plan in some cases. But you’ll typically need to show lenders at least a 12-month history of satisfactory payments on that plan. Items in collection are more of a gray area, but it’s best to get these paid off as well.
About 1 in 4 credit reports contain errors serious enough to result in denial of credit like a home loan, according to data from U.S. Public Interest Research Groups.
Comb through your credit report carefully and watch for the following potential errors:
You’re ultimately responsible for your credit report. That includes any errors that your report may contain.
That’s just a handful of the ways you can work to improve your credit score. There are so many other things you can do, and many of them will really depend on your specific situation.
Here’s one thing we suggest you avoid: Paying a company or an individual for credit repair. The big reason why is that you can do everything they can. There are plenty of great free resources online that offer tips and other concrete ways to boost your score. There’s no magic or secret to any of this.
It also doesn’t cost anything when it comes to changing the way you use credit. That’s just creating new and better habits.
One thing you can do is learn more about the Lighthouse Program® here at Veterans United. Lighthouse® consultants educate veterans, military members and their families about their credit reports and give them the information and tools they need to take action on their credit.
This free service has helped more than 17,000 veterans and service members overcome their credit challenges and go on to close on a home loan.
Call 855-259-6455 to talk with a Veterans United loan officer about how Lighthouse® can help you.