Is a new house in your future? With interest rates hovering at near record lows, this is the best opportunity to move forward on purchasing your dream home. Hold on though; before you can start looking for a house, you need to understand how much house you can buy. To even qualify for a mortgage, most lenders require a credit score of 620 and above for traditional programs. Even then, you can expect to pay over $240 more per month, and nearly $90k in additional interest over the life of the loan than you would with a higher credit score. Ouch! Get that credit score up, however, and a whole world of affordable financing will open up to you. Got a so-so or bad score? Here’s 7 ways to improve your credit.
1. Don’t rely on Credit Karma Scores
Credit Karma is a great place to get an understanding of your credit score, but is usually off by a pretty significant amount of points compared to your FICO score. The reason for this disparity is that Credit Karma uses a VantageScore Model, which differs from FICO. In addition, sites like Credit Karma may update daily while FICO only updates once per month. In other words, you may have paid off a big chunk of your credit card debt and it is reflecting a decrease in outstanding balances on Credit Karma, but it won’t show up on your FICO score for several more weeks.
2. Keep Each Card Below 30% Usage
You can increase your credit score by dropping the balances you owe to less than 30% of each card’s limit. It’s better to have smaller balances across all your cards than to have paid off cards with one card at 75% utilization. This can happen if you’re transferring balances, so weigh the good (you won’t pay interest on the balances for a set amount of time) with the bad (you will most likely be using a lot of your credit limit of the balance transfer card).
3. Keep Your Total Credit Utilization Below 30%
As if measuring the usage of each card isn’t enough, you also need to keep an eye on your total credit utilization, or how much of your overall available credit you are using. For all of your combined cards, the magic number, 30%, still remains. You can try to lower your utilization percentage by increasing your available credit.
First, see if you can increase credit limits on your cards.Some credit cards allow you to do this without a hard pull on your credit.
Next, you can apply for another line of credit. Be warned, every credit card you apply for will be a hard pull on your credit. Hard pulls, also known as inquiries, will ding your credit for the short term and stay on your report for two years each.
Lastly, you can apply for a low interest debt consolidation loan to pay off your credit cards. This will have a great effect on your credit score by reducing the utilization of available revolving credit, but don’t run your cards back up after paying them off, and never take out a loan you cannot pay back.
4. Diversify Your Credit
When FICO, and lenders, look at your credit history, they like to see a good mix of revolving credit (cards) and installments (loans). Having both on your credit report shows lenders you can pay different types of financial obligations. Revolving credit, however, gives lenders the best picture of how you manage your credit and weighs slightly higher on the scale of importance in credit factors.
5. Credit Report Errors
Credit Karma is a good place to check for errors on your credit history. You may be surprised to find a debt you had thought settled is still on your report and impacting it negatively. You may also find discrepancies in your credit score such as late payments or an account that was sold to another lender that you were unaware was still open.
6. Limit Your Credit Inquiries
Take advantage of the free soft-pulls offered by credit cards and banks to make sure you qualify before you apply for the funding. Soft pulls do not affect your credit, but are helpful in screening you out of offers that you don’t qualify for. What could have been a hard hit and a credit denial then becomes a soft pull and a denial. The denial may hurt your pride, but at least it won’t hurt your credit.
If you’re getting pre-approved or pre-qualified letters for credit, keep in mind that pre-approved is better than pre-qualified, but that neither one guarantees you will get the line of credit they are promising.
7. Beware of Credit Repair Companies
You may have considered hiring a credit repair service to go in and handle your credit report. They will generally charge you for information you can easily find on your own, and while they dispute an error on your behalf it may disappear, but it will be re-reported if it was an accurate entry.
Likewise, beware of debt consolidation services. Some will take your money and only pay the interest on your credit cards and their own fees, stretching the debt out even longer. You can accomplish far more on your own by creating a paydown schedule and sticking to it.
