Your credit score plays a large role in your financial future, especially when it comes to purchasing a home. A higher credit score can help you qualify for home loans with lower interest rates and save you money in the long run. It’s important to understand there is no quick way to fix a credit score. It’s best to avoid advice that claims to improve your credit score fast, as these strategies are the most likely to backfire. Instead, try these five tips to improve your credit health over time.
[Related: Getting a Home Loan with Bad Credit]
1. Pay Your Bills on Time
Payment history accounts for a third of your credit score, so paying your bills on time should be one of your top priorities. If you’re finding it difficult to make payments, consider spending only what you can afford to pay in full each month. Another option to avoid missed payments is to set up auto payments to pay your bills a few days after you receive your paycheck. Missed payments can drop your credit score and remain on your report for up to seven years; however, your score will begin to rise over time, especially as you establish a good payment pattern by paying your debts in full and consistently on time.
2. Keep old Debts and Accounts
Despite what many people believe, old debts, such as home or car debts, are good for your credit score if you’ve paid them off in full and on time. Keeping these paid debts on your report will help your credit score by positively contributing to your payment history. The same goes for old accounts where you’ve built up a good credit and payment history over time. Closing old accounts will likely shorten your credit history and reduce your available credit, which could lower your credit score.
3. Reduce the Amount of Debt You Owe
This task is easier said than done, but there are steps you can take to lower your debts owed, thereby improving your credit score over time. First and foremost, make a list of the fixed and variable expenses you incur each month. Fixed expenses cost the same amount each month and can include rent, phone and utility bills, car payments, and insurance payments. Variable expenses, or discretionary spending, can differ from month-to-month and can include eating out, shopping, and going to the movies. The next step is to create a budget, placing priority on your fixed expenses and scaling back your variable expenses if necessary. Managing a budget this way goes back to spending only what you can afford; if you find that you’re having a hard time paying off your fixed expenses, such as car payments or rent, it may be time to reassess your spending habits.
4. Optimize Your Credit Utilization Ratio
Your credit utilization ratio measures the balances you owe on your credit cards relative to the cards’ credit limits. For example, if your credit limit is $7,000 and you spend $1,000, your credit utilization ratio is 14%. It’s best practice to stay below 30%, as anything higher can lower your credit score. A low utilization ratio suggests that you use credit responsibly by spending only what you can afford. If you have trouble staying below 30%, try paying more than the monthly minimum on your credit card, or request a credit limit increase. But be aware, asking for a higher limit may temporarily lower your credit score.
5. Check Your Credit Report
Checking your credit report regularly helps you evaluate your current credit health. You can see if you’re making progress and your score is increasing, or if something is keeping you from reaching your credit score goals, such as late payments or inaccuracies in your report. You’re entitled to a free credit report every 12 months at each of the three credit bureaus, Equifax, Experian and TransUnion. We suggest requesting a credit report every four months so you can monitor your credit and ensure you’re making progress towards improving your credit health.
Now that you have these tips in your toolbox, it’s time to start utilizing them. By following what we outlined above, you’ll be well on your way to improved credit health and greater financial possibilities. If you’re ready to start your journey to home ownership, give us a call or send us a message. We would be happy to help you through the process and get you into your dream home this year.