Purchasing a new home can be an exciting, yet overwhelming, process. But there is always an element of added stress if you know your credit score isn’t quite where it should be. Just a few points can mean the difference between getting your dream home… or not.
To secure your Arizona dream home, you need to understand and improve your score so you aren’t going into a house hunt with the big credit score question mark. How are scores calculated? And what can you do to improve yours so you’ll always be an easy client for lenders?
Review Your Report
The first step in understanding your score is to pull your credit report. It might be scary, but go through the entire report to be sure there are no errors or inconsistencies. Any payments made on time that show as late, outstanding debts you already paid off, or anything you don’t recognize that could be fraud should immediately be reported and amended.
What Is a Good Score?
The most commonly used scoring methods by the major rating agencies range from 300 to 850 with the higher the score, the better your credit. The average FICO score, a commonly used credit agency, is 695. Usually anything below 629 is considered below average while anything from 629 to 689 is fair. Over 690 is thought to be good and over 720 is excellent.
How is my Score Calculated?
You credit score is meant to measure your overall creditworthiness and the likelihood that you will pay off your debts in a timely fashion. One of the major factors in your credit score is your credit-utilization ratio, which is the total amount of credit given to you as it compares to your total credit use. For instance, if you have a $9,000 balance on a credit card with a $10,000 credit limit, your ratio of 90% may result in a lower score.
Other factors may play into your score like number of open accounts, the amount of recent credit inquiries, late payments, and your larger loans like student or car loans. Your score is regularly updated as your financial situation changes.
How Can my Credit Score Affect my New Home Purchase?
What if you have a lower score, such as one in the 500s? You may still be able to get credit, but it will come at the high cost of huge interest rates and larger deposits. A score of over 750 and you’ll likely get the best rates and have an easier time acquiring a home loan from a lender.
How Can I Improve my Score?
Is it possible to improve a poor score? Absolutely. First, pay down your credit balances. If you have outstanding debt on any of your credit cards or loans, now is the time to pay it down. Your total debt compared to your available credit will be a huge determining factor of your score. It’s best to start with the credit cards with the highest total debt to credit ratio because any balance over 90% of the card’s limit will be an even bigger red flag for the credit bureau.
Keep existing accounts open, even if you aren’t using them anymore. It may feel natural to close out and cancel any excess credit cards as soon as you’ve paid them off, especially if they have yearly fees, but you should think twice about this. Account age is also factored into your credit score. The longer you’ve had accounts open, the more this positively effects your overall score.
Pay your bills, and on time. When you’re in the process of improving your credit score this is the critical time to be sure you’re paying all your bills on time and if you can, more than the minimum payment amount.
Don’t open new accounts if you can avoid it. While you may think opening new accounts or applying for additional credit cards will help with your debt to credit ratio, your credit report will reflect any inquiries that occur when opening a new account. One or two inquiries might not change your score significantly, but If you have an excess amount of recent inquiries your score could go down.
With some serious focus and budgeting, you can pay off significant debt and improve your credit score in no time at all. Take on some extra projects to pay off the debt. Perhaps you can have a garage sale, take on a weekend job, or do some freelance work. Having a high credit score will not only save you money in the long run, but it may be the difference between owning or not owning your next Arizona dream home.
