6 Tips to Get Your Credit in Shape
Good credit habits, like good gym habits, aren’t built overnight. They take time and discipline to develop. The challenge for a lot of people is knowing where and how to begin, but it’s possible to get your credit in shape, just like your body.
If you’re ready to start today, these six habits can help you strengthen your financial portfolio and get you on track to homeownership.
1. Assess Your Situation
You might have an idea of your credit standing, but it’s helpful to get specific. You have to know where you are to get where you dream of going. Get started with your free credit report from Annual Credit Report.com.
Review your list of open accounts, account balances, credit inquiries, and deficiencies. Be especially attentive to potential errors. With all this information in hand, you can determine if anything is negatively influencing your credit score and chart your course forward.
Unfortunately, free credit reports don’t include your credit scores. Some credit card companies and big banks provide free credit scores to their customers. There are alternatives to peeking at your score, but you may need to pay a fee or sign up for a monthly credit-monitoring service.
2. Set a Goal
On your journey to creating better credit habits, it’s good to familiarize yourself with the credit score benchmarks many lenders require to secure home financing. This information gives you a goal to aim for and keeps you heading in the right direction.
Lenders typically look at your FICO mortgage credit score from each of the three major credit-reporting agencies: Equinox, Experian, and TransUnion. FICO scores range from 300 to 850 and different lenders can have different cutoffs.
VA and FHA lenders generally set the bar at a 620 minimum credit score. For a conventional loan, the bar may be a 660 minimum, although you might need a much higher score to contend for great rates and terms.
3. Strengthen Your Core
If your credit is lagging behind, don’t give up. You can take some simple steps to bounce back from “shaky” or “less than perfect” credit.
Prioritize on-time payments. Your payment history is the most important factor in FICO’s credit formula, accounting for 35% of your score. One late payment can topple your score up to 110 points, and the more payments you miss, the longer it will take to recover.
You should also focus on keeping your credit card balances under 30% of the credit limit. For example, a $5,000 line of credit needs to be kept below $1,500. When you max out a credit card, many lenders see it as an indicator that you’re overreaching your budget.
4. Trim Some Fat
Once you establish a habit of making on-time payments, it’s good to start setting and paying your outstanding debts.
Some financial experts recommend tackling your smallest debts first, regardless of interest rates, because even a little progress can help you generate momentum. Others suggest targeting debt with the highest interest rate.
Borrowers with judgments, tax liens, and federal debts may need to get those issues addressed before being able to close on a mortgage. In some cases, creating a repayment plan with a debt holder and establishing a satisfactory payment history may allow you to move forward on a loan. Talk with lenders about their specific policies.
5. Build a Routine
Strengthening your credit requires more than short-term energy and focus. You need to think long-term and develop effective habits. The length of your credit history accounts for 15% of your score.
FICO estimates that high scorers have been building a credit profile for 11 years.
Keep this in mind when you want to get out the scissors and close old credit cards no longer in use. It can be wise to keep these accounts active and maintain the length of your credit history.
6. Don’t Go Overboard
Sometimes when you’re eager to buy a home and establish a credit history, you may be tempted to try quick fixes. One common mistake is to open several new credit accounts. Although this may seem like easy math for improving your credit score, it isn’t. Multiple credit pulls in a short period can negatively affect your score.
Watch your spending as well. From appliances and furniture to so much more, there are many purchases people want to make in connection with buying a house. Fight the urge and keep your credit and finances steady once you’ve decided to start on the path to homebuying.
Taking on new credit and debt during your homebuying journey could actually derail the whole process.
