Homebuying is essential for many Americans. It’s a time when you finally feel like an adult, you’re building equity, and you’re making a long-term investment. But for first-time homebuyers, it can be a daunting task. Not only do you have to find the right house or apartment, but you also have to save up for a down payment, get a mortgage, and deal with all of the paperwork. And if your credit score isn’t good enough, you might not even be able to get a loan in the first place.
That’s why we’ve put together this guide on how to improve your credit score. Sadly, some first-time homebuyers don’t even know they have credit scores. So here’s what you need to know about your credit score and how to improve it.
What is a Credit Score?
A credit score is a number that lenders use to decide whether or not to give you a loan. It’s based on your credit history, a record of how you’ve handled borrowing and repaying the money. The higher your score, the more likely you will get approved for a loan.
There are different credit scores, but the most common is the FICO score. This score ranges from 300 to 850, and the average person has a score of about 700. If your score is below 600, getting approved for a loan might be difficult. And if it’s below 500, it will be challenging.
However, some loans give people with low credit scores a chance to buy a home. The first is an FHA loan. Such a loan only requires people to have a credit score of 580. If you have a lower score, you might still be approved if you make a larger down payment. It’s a great way to get a home without paying too much.
Two main things affect your credit score: your payment history and your credit utilization. Payment history records whether or not you’ve made your payments on time. Credit utilization is how much of your available credit you’re using.
Other factors can also affect your scores, like the length of your credit history and the types of credit you have. But payment history and credit utilization are the two most important factors. If you’re looking to improve your credit score, you can do a few things.
Check For Errors
The first step is to check your credit report for errors, and you’re entitled to a free credit report from each of the three major credit reporting agencies annually. You can get them at AnnualCreditReport.com. Once you have your report, go through it carefully and look for any mistakes. If you find one, dispute it with the credit reporting agency.
Pay Your Bills on Time
Paying all of your bills on time every month is essential. That includes your rent, utilities, credit cards, and anything else. Even if you can only afford the minimum payment, make sure you pay it on time.
If you’re struggling to keep up with your bills, there are a few things you can do. You can set up automatic payments, so you don’t have to worry about remembering to pay each bill. You can also talk to your creditors and see if they’re willing to work with you. Many companies are understanding, especially if you explain your situation.
Keep Your Utilization Low
Your credit utilization is the amount of credit you’re using divided by your available credit. So, if you have a credit limit of $1,000 and use $500, your utilization is 50%.
It’s essential to keep your utilization low because it shows that you’re not relying too much on credit. Aim for utilization of 30% or less. If your score is below 600, aim for 10% or less.
You can lower your utilization by paying off your debts and asking for a higher credit limit. If you have a good history with a particular creditor, they might be willing to give you a higher limit.
Build Your Credit History
If you don’t have much credit history, getting approved for a loan can be difficult. This is because the length of your credit history is one factor that determines your score. So, your score will be lower if you don’t have much history.
There are a few things you can do to build up your history. For example, you can get a secured credit card backed by a deposit you make. You can also become an authorized user on someone else’s credit card, and you can take out a small loan from a financial institution and repay it on time.
Improving your credit score takes time, but it’s worth it if you want to buy a home. Following these tips can improve your chances of getting approved for a loan. It will allow you to buy the home of your dreams without saving for years. It will also give you a chance to various investment options such as refinancing and home equity. So build your credit score now!