We all know having a good credit score is important when thinking about buying a home. But do you know why? And to what extent?
Lenders use your credit score to determine how likely you are to pay back a loan on time. By defaulting on credit card payments, you give a reason for a lender to look at you as a risk. The higher your score is, the greater chances you have at getting approved for the best loan program possible.
What constitutes a good or bad credit score?
The first-time home buyers seminar we went to was extremely helpful when it came to understanding our credit. When I was in college, one of my professors showed us a movie on the dangers of credit cards companies and how easy it is to ruin your credit. It scared the crap out of me, for the lack of a better word, and was pretty extreme. Taking that first-time home buyers seminar and talking with lenders has helped understand my credit and what lenders look for in terms of a good score.
Credit scores range from 300–850. Most scores fall in between 600-700. Generally a score above 700 suggests good financial management.
The lenders that I’ve spoken with have said that the very best score for all programs would be a 760. However, for programs such as FHA & USDA loans , lenders look for at least a 640. Generally speaking, the higher your score, the lower your interest rate for your loan.
So how can I get my credit score up?
If you have a lower credit score, don’t fret just yet. There are plenty of ways you can raise it, however, I suggest start understanding your credit and implement these ways as early as you can.
- First and foremost, if you have balances on credit cards… PAY. THEM. DOWN. Start with the largest first, or the balance that is closest to its limit, and begin budgeting a weekly amount you can put towards that card. Remember to pay on time! Set a reminder or create automatic payments when available.
- DO NOT cancel any cards. It can be tempting to but this could actually lower your score. See having those credit cards mean you have credit to utilize. Once you start canceling cards, you decrease that amount of utilizable credit, which can have a negative effect on your score. If you’ve paid off the balance, it’s still a good idea to keep those cards open.
- Check for mistakes on your credit score. People make mistakes and so do credit card companies. There could be an error such as a college loan that’s been paid off in full but not reflected on your credit. Finding those mistakes sooner rather than later will make it easier to fix.
- Be careful how many times your credit gets pulled. It’s not a good idea to keep checking your credit score on a monthly basis, this can negatively affect your score. If you’re looking for a loan, ask your lender more about this!
- Make friends with your credit lender. If there is clear communication and they know you’re paying your card down consistently, they are, more often than not, willing to help you. It’s never a bad idea to call and ask for them to lower the interest rate or remove a late payment!
- Use your cards lightly. Be smart about using money you don’t have. There are some great resources and financial advisors out there that are more than happy to answer your questions!