Tips To Help Clean Up Your Credit Score
“The best time to buy a home is always five years ago.”
—Ray Brown, jazz musician
Sure, it’s easy to fall in love with the idea of buying a home. You’ve got it all planned out: a three-bedroom home in your favorite neighborhood with a manicured lawn and—why not?—a nice pool.
But if you’re going to get a mortgage (and of course, most homebuyers do), you may need to improve your credit score, also called a FICO score—a simplified calculation of your history of paying back debts and making regular payments on loans. If you’re borrowing money to buy a home, lenders want to know you’ll pay them back in a timely manner, and a credit score is an easy estimate of those odds. Here’s your crash course on this all-important little number, and how to whip it into the best homebuying shape possible.
Pull your credit report
There are three major U.S. credit bureaus (Experian, Equifax, and TransUnion), and each releases its own credit scores and reports (a more detailed history that’s used to determine your score). Their scores should be roughly equivalent, although they do pull from different sources. For example, Experian considers on-time rent payments, while TransUnion has detailed information about previous employers.
To get a free copy of your credit score, go to CreditKarma.com. For a free copy of your full credit report, you can get that once a year at AnnualCreditReport.com. Or check with your credit card company; some offer free access to scores and reports, says Michael Chadwick, owner of Chadwick Financial Advisors in Canton, CT.
Once you’ve got your report, thoroughly review it, page by page, particularly the “adverse accounts” section, which details late payments and other slip-ups.
Assess where you stand
It’s simple: The better your credit history, the higher your score—and the better your opportunities for a home loan. Major lenders often require a minimum credit score of at least 620, if not more.
So what can you do if your credit report is less than shipshape? Don’t panic, there are ways to clean it up.
How to improve your credit score with error disputes
A Federal Trade Commission (FTC) study found that 5% of credit reports contain errors that can ding your score. So if you spot any, start by sending a letter to the bureau disputing its account, providing as much documentation as possible, per FTC guidelines. You’ll also need to contact the organization that provided the bad intel, such as a bank or medical provider, and asks it to update the info with the bureau. This may take a while, and you may need documentation to make your case. But once the bad info is removed, you should see your score go up.
Erase one-time mistakes
So you’ve made a late payment or two—who hasn’t? Call the company that registered the late payment and ask that it be removed from your record. “If you had an oopsy and missed just a payment or two, most companies will indeed tell their reporting division to remove this from your credit report,” says financial planner Bob Forrest of Mutual of Omaha. Granted, this won’t work if you have a history of late payments, but for accidents and small errors, it’s an easy way to improve your credit score.
Increase your limits
One no-brainer way to increase your credit score is to simply pay off your debt. Not an option right now? Here’s a cool loophole: Ask your credit card companies to increase your credit limit instead. This improves your debt-to-credit ratio, which compares how much you owe to how much you can borrow.
“Having $1,000 of credit card debt is bad if you have a limit of $1,500. It isn’t nearly as bad if your limit is $5,000,” Forrest says. The simple math: Although you owe the same amount, you’re using a much smaller percentage of your available credit, which reflects well on your borrowing practices.
Pay on time
If you’re often late with payments, now’s the time to change. You have the power to improve your credit score yourself. Commit to always paying your bills on time; consider signing up for automatic payments so it’s guaranteed to get done.
