Credit Scores Can Change
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.
Use Credit Responsibly
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.
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Keep Credit Card Balances Low
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.
Don’t Close Old Accounts
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.
Settle and Pay Outstanding Debts
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:
- Accounts that do not belong to you: Your report could contain information that belongs to someone else with the same name.
- Collection accounts: As the name suggests, collections are items that have been turned over to collection agencies. Review this section carefully for any inaccuracies, such as a collection that’s been paid. Collection items can seriously tarnish your credit score.
- Accounts past due and late payments: Carefully check any items that are reported as “past due.” It’s certainly possible for a creditor to miss your payment or mistakenly report an item as delinquent.
You’re ultimately responsible for your credit report. That includes any errors that your report may contain.
Fixing errors on your credit report is a three-step process, and it starts with notifying the credit bureau or bureaus.
Here's a quick look at these three basic steps:
Step 1: Dispute the error with the credit bureau.
Obtain your credit report from all three credit bureaus. Send a letter to any bureau that is reporting the error. That could be either one or all three of the credit reporting bureaus (Experian, Equifax or TransUnion). Credit scoring firm FICO has a good sample dispute letter on their website.
Step 2: Inform the creditor (in writing) of the error.
You’ll also want to contact the appropriate creditor. This could be the credit card company, retailer or lien holder who is reporting the error to the credit bureau. You can typically send the same letter and documentation to both the credit bureau and the specific creditor.
Step 3: Check back often.
Credit bureaus are required to investigate errors within a short period of time, usually 30 days. Creditors can take a bit longer to respond, but generally reply within 30 to 90 days. If you fail to get a response, check back in writing and follow up with a phone call.
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.
What to Avoid
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 30,000 veterans and service members overcome their credit challenges and go on to close on a home loan.
Talk with a Veterans United loan specialist about how Lighthouse® can help you.