Whether you’re making a major purchase OR buying a home – your credit score matters!
When you’re buying a home – your credit score matters! And it needs to be in good shape or you could end up paying a higher interest rate or even be turned down for a loan. Understanding what contributes to your credit score, how to improve and maintain it, and how to correct errors on your credit report, is an important first step if you’re ready to buy a home.
What’s a credit score?
Your credit score is a number calculated by credit reporting agencies who assess your personal information and monitor your credit history. The number is of extreme importance to lenders because it shows your suitability for credit and indicates your ability to repay your debts.
Your credit score is configured based on your:
- Payment history (including utility bills, rent, credit card bills, car loans)
- Debt-to-credit ratio
- Length of credit history or the amount of time your credit has been established
- New credit accounts
- Diversity of credit
Improving your credit score
Getting and keeping a strong credit score takes work. To start, it’s imperative that you check your credit report yearly at www.annualcreditreport.com. Take action to correct any mistakes you find on the reports you’ll receive from the three national credit bureaus (Equifax, Experian and TransUnion) that capture, update and store credit histories on most U.S. consumers.
Improving your credit score is an ongoing process. Here’s how to start:
- Pay bills on time. Late payments and collections will negatively impact your score.
- Reduce credit card balances. When you max out your credit cards, it can negatively affect your credit score.
- Apply for additional credit. If you have limited credit, haven’t had credit very long, or have no credit at all, you’ll have insufficient credit history or even none at all. This can negatively affect your credit score – and your ability to get a mortgage.
Maintaining your credit score
These tips will help you stay in control of your credit:
- Track expenses. Save every credit card receipt to check against monthly statements. Report any discrepancies immediately.
- Create and follow a budget. Having a plan every month for how you’ll save and spend can help you use credit wisely.
- Pay credit accounts monthly. Always make at least the minimum payment required. Better yet, charge only what you can pay in full monthly.
- Spend within your limits. Follow your budget diligently.
- Be prepared for emergencies. Avoid maxing out credit cards so you have credit available in case of an emergency. Even better, have a savings account for emergencies to avoid having to take out additional credit.
- Keep creditors informed. If an emergency or a job loss means you’re unable to make debt payments, let lenders know immediately. They may be able to work with you if given sufficient notice.
When you need to use credit
Follow the 20/10 rule: your total debt should not exceed 20 percent of your annual net income (i.e., after taxes and other deductions). Keep monthly debt payments to less than 10 percent of your monthly net income.