Whether it was a foreclosure, short sale, deed-in-lieu of foreclosure, a job loss or just plain irresponsibility, there are some steps you can take to get your credit score back into the range where it is attractive to mortgage lenders and you can finally buy that house.
Where does my credit score come from?
Credit scores range from 300 (the worst) to 850. Although a score of 700 will get you lower rates and more credit opportunities than lower scores, 760 and above is considered prime.
If you’ve ever ordered your credit report you did so from one or all of what are commonly known as “the big three” credit reporting agencies: Experian, TransUnion and Equifax.
These agencies compile massive amounts of financial information obtained from companies from which Americans have obtained credit in the past. From this, they determine each person’s payment history, the length of the person’s credit history, the various types of credit he or she has and the amount of credit debt held.
When the big three agencies turn their information over to Fair Isaac Corporation (FICO) or, in some cases, Vantage, it’s fed into a complicated formula and out pops a three-digit number that pretty much rules your financial life. Thankfully, your credit score adjusts, according to how risky you appear.
Pay on time
The best way to repair your credit score is by paying your bills on time, every month. Yes, it sounds simple and it is the responsible thing to do, but it’s also one of the quickest ways to pump your score into a more acceptable range. Don’t believe us? According to a study conducted by Experian,100 percent of super prime consumers and 97 percent of those with prime credit have no late payments on their credit reports.
Furthermore, The Raleigh Area Development Authority says that a person with a 707 credit score can raise it 20 points, just by paying bills on time for one month.
Manage the plastic
Your use of credit cards may be the culprit when your score is at rock bottom.
First, credit scoring agencies look at the age of your credit. New credit, such as opening new credit card or department store accounts, makes them leery. Just what will you do with all this new-found credit? Since they don’t know, you become a higher credit risk and take a 10 point ding on your score.
High balances make you appear risky as well. If your cards are maxed out you may lose up to 70 points on your credit score.
Don’t close your credit card accounts, just pay them on time. Consumers with no credit cards or installment loans look risky (it’s that fear of the unknown again) and tend to be penalized with lower scores. Besides, closed accounts still show up on your credit reports and may still affect your score.
If you have the money in your budget, another quick way to raise your score is to pay down high credit card balances. Try doubling your payments for a few months or at least pay a payment and a half.
If you build it, you can buy it
Many Americans didn’t do anything to deserve a low score other than to have never used credit. To credit scoring agencies, these people are, again, unknown entities. How they will use credit when they receive it is a mystery and therefore makes them a credit risk in the eyes of the agencies.
Unlike the folks that need to slow down on their credit card usage, you need to obtain a card, use it and pay the balance on time. Ensure that you obtain a card from an institution that will report your responsible use of credit.
To make it easy on you, we’ve compiled this handy, fix-your-credit checklist:
- Order your credit reports from each of the big three agencies to determine where you stand
- Dispute any errors you find on your credit report. Some shady credit counseling companies may suggest you dispute everything on the reports, which may do way more harm than good. The Federal Trade Commission offers advice on how to file disputes on its website.
- Pay all your bills on time, every month
- Pay down your credit card balances. If you can only afford to pay one at a time, pay department store cards first, if you have them, otherwise, pay off the one with the highest balance first. Aim to get the balances within 30 percent of your credit limit.
- Use old credit cards that you haven’t used lately to keep their histories active. Remember, old credit is worth more than new credit when it comes to your score.
- Obtain a secured credit card if you have no credit history. Use the card for small purchases and pay the balance on or before the due date.
- Consider obtaining a small loan if your credit report lacks an installment loan history. Ensure that the lender reports to all three agencies.
- Ask creditors to re-age your accounts. This might be challenging but if even one creditor agrees to do so your score may improve dramatically.
- Ask the credit card companies to increase your credit limit