4 months 6 days ago
By the time you hit your late twenties or early thirties, the idea of owning a home probably doesn’t feel like some far-off fantasy anymore. Maybe you’re tired of renting, or you’re watching friends post pictures of their new backyards, or you’ve simply saved up enough for a down payment. But here’s the thing that can stop you in your tracks: your credit score. A mortgage lender looks at that three-digit number very closely, and if it’s not where it needs to be, you might end up paying thousands more in interest over the life of the loan — or getting turned down entirely. The good news is that you have time to fix it, and you don’t need to become a financial wizard to do it. You just need a plan and a little patience.First, you need to know where you actually stand. A lot of people guess their credit score or assume it’s fine because they pay their phone bill on time. But your score is based on your entire credit history, including loans, credit cards, and even collection accounts you forgot about. Get your free credit reports from the three major bureaus through AnnualCreditReport.com. Don’t pay for your score right away — the report is what matters. Look it over carefully. You might find mistakes like an old address, a late payment that was actually on time, or even a bill that isn’t yours because of a mix-up. Disputing those errors can give your score a surprisingly quick boost. Most experts agree that a 30-minute check of your reports is one of the smartest things you can do before applying for a mortgage.Once your reports are clean, focus on your credit card balances. This is the biggest lever you can pull. Your credit utilization ratio — the amount you owe compared to your credit limits — makes up a large chunk of your score. Say you have a card with a $5,000 limit and you owe $4,500. That’s 90 percent utilization, and lenders see that as risky behavior. You want to get that number down to at least 30 percent, but lower is even better. Aim for 10 to 20 percent if you can. That might mean paying off a big chunk of debt over several months. It might also mean asking for a credit limit increase, which instantly lowers your utilization as long as you don’t spend more. Just be careful — some creditors do a hard pull when you ask for an increase, which temporarily dings your score. But it can be worth it in the long run.Another thing to adjust is your habit of applying for new credit. When you’re in your twenties, it’s tempting to sign up for a store card to get 20 percent off your purchase or to open a new rewards card because the signup bonus looks great. But each application triggers a hard inquiry on your credit report, and that can knock a few points off your score. In the year or two before you plan to buy a home, stop applying for anything that isn’t absolutely necessary. That includes auto loans, personal loans, and even that new furniture financing offer. Let your credit history sit still and age. The longer you have a mix of accounts working for you, the better your score looks. Old credit accounts, even ones you don’t use much anymore, help build your average account age. So don’t close that first credit card you got when you were 19, even if you hate the annual fee. If the fee is high, call and ask if they can switch you to a no-fee version. Closing an old line of credit shortens your history, which can hurt your score.You also need to be ruthless about paying every single bill on time. It sounds obvious, but one late payment can stay on your credit report for seven years. That’s a long time to carry a mistake. Set up automatic payments for the minimum amount at least, or use calendar reminders. If you’ve already had a late payment, try calling the company and asking for a one-time forgiveness. Sometimes they’ll remove it if you promise to set up autopay. It never hurts to ask, and the worst they can say is no.Finally, think about your debt-to-income ratio, even though it’s not on your credit report. Lenders use it to decide how much mortgage you can handle. Add up all your monthly debt payments — student loans, car loans, credit card minimums — and divide that by your gross monthly income. If that number is above 43 percent, you’ll struggle to get approved for a conventional loan. So the same actions that help your credit score — paying down balances, not taking on new loans — also improve this ratio. Every dollar of credit card debt you pay off helps twice over.Raising your credit score before buying a home doesn’t happen overnight. If you’re planning to buy in the next year or two, start now. Check your reports, pay down those balances, stop applying for new credit, and pay everything on time. It’s not glamorous, but it’s the difference between getting a 6 percent mortgage and a 7.5 percent one. Over thirty years, that single point can cost you tens of thousands of dollars. Do the boring work now, and you’ll walk into your first home with confidence — and a monthly payment you can actually afford.Your credit score is like a grade for your borrowing history. A high score tells the lender you’re a safe bet, so they reward you with a lower interest rate. A lower score makes you look riskier, so they charge a higher rate to protect themselves. Think of it this way: a great score could save you tens of thousands of dollars over the life of your loan just by getting a better rate. It’s the single biggest reason to build your credit before you apply.
Going over your limit can cause several problems. You might have to pay an expensive over-limit fee. Your card could be declined at the checkout. Most importantly, it can seriously hurt your credit score because it looks like you’re in financial trouble. It’s a signal to lenders that you might be a risky person to lend money to in the future.
You can find out your score in a few easy ways. Many banks and credit card companies now offer free credit score access right in your online account. You can also use trusted websites like AnnualCreditReport.com to get a free copy of your credit report from each of the three major bureaus once a year. Some services provide your score for free as part of their monitoring. It’s your information, so you have a right to see it!
Older, well-managed accounts are great for your score because they show a long history of being responsible. Your credit score likes to see that you have experience using credit over many years. This is why it’s often a good idea to keep your oldest credit card account open and use it lightly. Closing an old account can actually shorten your credit history and might cause your score to dip. Think long-term and let your accounts age gracefully.
The main “catch” is that you cannot use the money until you’ve paid the loan off. You need to be sure you can stick to the payment schedule for the full term. Also, while interest rates are generally low, you are paying some interest for this service. If you miss a payment, it will hurt your credit score just like any other loan. So, only sign up if the monthly payment fits easily into your budget.
