Tips for Boosting Credit to Apply for a Loan
There are many ways to prepare to buy a home. From checklists of things to look for while buying to deciding what real estate agent to use, buying a home has several moving parts that will eventually culminate in purchasing and owning a dream home. Since there are so many things to take into account, it may be good to start early - before even looking to purchase- in order to ensure that the financials are in order. This can ease some of the stress that comes with buying a home, plus it allows a potential home buyer to focus more on the exciting process that is finding a dream home.
Funding a dream home can be done in many ways, but one of the most important things to work on not only affects the home buyer, but it also spills into other areas of everyday life. Credit scores can seem like they are a random assortment of equations that lead to a nebulous number, but there is a method to the madness. When someone needs to borrow money in the form of a loan, the credit score is often the first place a bank or money lender will look. The reason for this is that a credit score takes into account past lines of credit a person has opened and paid off or is in the process of paying off. A higher score tends to indicate that the individual has been prompt and responsible with paying off previous loans, therefore will likely be able and willing to pay off loans in the future. A lower number can mean a few things, but most commonly individuals with lower numbers have either had financial struggles and are still building their credit back or they haven't had much of a history regarding lines of credit. The more often an individual misses payments or has other problems such as bankruptcy, the less faith a lender may have in their ability to pay off a new loan.
As mentioned, having a higher credit score can be the difference between taking out a loan for a dream house or having to move on to a less ideal place. Luckily, raising a credit score is something potential homebuyers can and should do even before searching. While it is possible to change your credit score by doing some relatively simple things, many feel discouraged by the fact that credit scores don't change on a dime. They can take anywhere from a month to several months to bump up the number. Though this may seem discouraging if the number isn't initially close to the desired goal, it's important to remember that boosting the credit score can lead to more exciting prospects so it's important to stay positive and look to the future.
One of the main ways to maintain a credit score is to strive to pay bills on time or early. If this is not possible, then working out a payment plan or other such programs prior to the bill becoming late is crucial. The reason for this is that bills paid on time may not show up directly on your credit score, but when they are overdue and head to collection agencies, this does tend to show up and will tell banks that the potential borrower is financially irresponsible. That doesn't bode well as lenders would like to ensure that their money will be repaid.
A potentially small knock to the credit score is checking the credit score or when businesses check the credit score such as when trying to apply for other lines of credit. This doesn't necessarily mean that shopping around to different banks and lenders is a bad idea, but it would be a good idea to open any credit cards, etc. at least a few months prior to applying for a mortgage. The small impact that this has does clear up after a short time which is why it may be good to get other lines of credit- like a new car loan- applied for at least a while before beginning the process of home loan applications. Luckily, it is possible to receive at least one free copy of the credit score per year from each of the three primary companies that provide the reports, so that will not count against a score.
While it may seem counterintuitive or a little scary to people who have never had a credit card before, one of the greatest pieces of advice regarding raising a credit score is to get a credit card. It's incredibly important to note that this bit of advice comes with the caveat that the card must be used responsibly or it could have the opposite effect on a credit score. One way to effectively ensure that overspending doesn't happen is to set automatic payments for utilities and other consistent, then pay off the credit card with the money that would have been taken out of the checking account had it been charged instead. It's also not a terrible idea to have a backup credit card for emergencies. For every credit card, it is suggested that the balance owed remain under one-third of the credit limit in order to continue helping the credit score as opposed to dragging it down.
Because credit scores can take a little bit of time to go up and down, beginning to raise the score is definitely a good idea at least a few months in advance. Likewise, planning ahead with other large purchases such as cars should be done slightly in advance as well so that there is time for the credit requests from potential loans have a chance to fade into the distance. Taking these steps can help to put the most amount of loan assistance in the hands of the potential buyer, which could open more options in the real estate market.