How to Fix Credit to Buy a House? Top Tips

If your bad credit is halting the home-buying process, we’ve put together a guide on the fastest ways how to fix your credit to buy a house.

You are supposed to Get Current With Your Bills, Raise Your Credit Limits & Reduce Your Credit Balance, Refrain From Opening New Credit Cards and Loan Accounts, Keep Existing Credit Accounts Open, Fix Your Credit Report Errors, Use a Credit Builder Tool, and Be Patient.

A good credit score improves the likelihood of qualifying for a home mortgage. The lender will see this as a sign that you handle money responsibly and are likely to pay back your loan on time.

What is My Credit Score?

Your credit score is a numerical evaluation that shows a lender how responsible you are with loans. Lenders can tell that you don’t borrow more money than you can afford to pay back if you have a high credit score because you pay your bills on time.

Low credit scores, on the other hand, suggest that you might be a credit risk. Lenders notice that you might occasionally miss payments, that you might frequently overextend your credit limit, that your account is still very young, or that your spending patterns are unpredictable.

The three main reporting agencies, Equifax, Experian, and TransUnion, collect information on your spending patterns and create a score for you based on your individual spending and bill-paying patterns.

What Goes into a Credit Score?

A credit score is composed of over 50 different factors, which are divided into five categories.

1. Your payment history
2. Your borrowing habits
3. Your track record
4. Your recent attempts to secure more credit
5. Your experience with different credit types

The credit score formula gives each category different weights as well as weights for recent activity. The past six months’ worth of events have a greater impact on scores than those from two years ago because they are more accurate forecasters of the coming 90 days than events from a previous period.

So starting today and waiting to develop good credit habits is the best way to raise your credit score.

Your credit score will noticeably improve in the next six months.

Some notable traits don’t affect credit scores, including:

• age
• gender
• race
• religion
• national origin
• marital status
• political affiliation
• medical history
• criminal record
• whether you receive public assistance
• salary
• employer
• job history

Only merit-based factors determine credit scores, and anyone can achieve perfect credit.

Ways to Fix Your Credit Score

In the United States, there are three major credit bureaus – Experian, TransUnion, and Equifax. The credit rating formula is created by the three bureaus, with slight weighting differences.

Their models are confidential, but thanks to patent applications and open data, we have a solid understanding of what makes a credit score strong and how to raise it.

Follow these seven steps to repair your credit so you can buy a home.

Get Current With Your Bills

Why it works: Your credit score is 35 percent based on your payment history.

Your repayment record to creditors, such as lenders, lessors, and credit card companies, is known as your payment history. The best payments are those that are made on time, but damage from an occasional 30-day late payment is minimal. 60-days late or longer, and bills in collection are more damaging.

How to improve: Get your bills current, and then keep paying them on time each month. Your credit score will start to rise after three months. Your score can almost completely recover after six months. If you must order things, pay your minimum credit card, auto, and student loan payments first. Afterward, settle the remaining balance on your credit card as well as any other outstanding debt.

Raise Your Credit Limits & Reduce Your Credit Balance

Why it works: 30% of your credit score is determined by the amount owed.

The ratio of the amount owed to the amount of credit being used is the amount owed. It’s a percentage, not a fixed sum of money.

Using all of your available credit is known as being “maxed out.” Less than one-third of their available credit is what the credit bureaus prefer from consumers. Your score can be impacted if your credit usage is over 50%.

How to improve: Your credit utilization ratio declines with higher limits. First,pay down your individual credit card balances until you’re using less than one-third of your available credit limit on each card.

Call the companies that issue your credit cards and ask for a higher credit limit. When prompted, say no to having your credit score checked as part of the raise and agree to accept whatever new limit you are given.

Refrain from Opening New Credit Cards and Loan Accounts

Why it works: Your credit score drops 10% when you get new credit.

The new accounts that you or another person opened in your name constitute new credit. Credit cards, student loan refinancing, and auto loans and leases all constitute new credit. Additionally, store credit cards that offer 10% off at the register are included. The credit bureaus view new credit negatively because it reduces consumers’ capacity to pay other bills.

How to improve: In the months before you buy a home, refrain from applying for new credit using your social security number. Pre-approvals are accepted during the home buying process and barely affect your credit score. It’s risky to use new credit and store charge cards.

Keep Existing Credit Accounts Open

Why it works: 10% of your credit score is based on the mix of your consumer debt.

The assortment of credit accounts that make up your credit history is known as your consumer credit mix. Mortgages, auto loans, student loans, personal loans, and credit cards are examples of different credit types. The credit reporting agencies look at your mix of consumer credit to determine how you handle various account types as part of your overall credit profile. By keeping your other accounts open, you’ll naturally maintain a healthy credit mix.

How to improve: Even after you’ve gotten a credit card balance to $0, your work isn’t done. Keep the credit line open, make a small monthly purchase, and settle the balance in full when the invoice comes in.

You can compel your creditor to inform the bureaus that you borrowed money and promptly paid it back by paying as little as $5 each month. As opposed to closing the account and watching it deteriorate or creating new accounts, this is preferable.

Fix Your Credit Report Errors

Why it works: Your score can be reduced by up to 100 points as a result of errors on your credit report.

According to a recent Consumer Reports study, one-third of American consumers’ credit reports contain mistakes that lower their scores. Credit report errors can link to criminal acts such as identity theft, but more often, they’re common mistakes like:

• A credit card company isn’t reporting your credit limit
• A paid-off student loan still says it’s active
• A charge card reported a late payment by mistake

Additionally, if you share a name or social security number with someone else, you might find that your credit report has been combined with theirs.

How to improve: Upon receiving pre-approval for your mortgage, you will receive a copy of your credit report. Your credit is not impacted by this. Instead, it can assist you in identifying errors. Take a look at the data and implement the necessary corrections. Most errors are simple to fix online.

Use a Credit Builder Tool

Why it works: You might need assistance at times to improve your credit.

Consumers can take back control of their credit score and reporting by using a credit building tool. A person’s credit history is improved by using credit builder tools, which also aid in saving money.

How to improve: StellarFi automatically pays and reports every recurring bill through their platform to the three credit bureaus, Equifax, Experian, and TransUnion are trademarks. There are no deposits, no credit checks, and no interest charges.

Be Patient

Why it works: 15% of your credit score is based on how long you’ve had credit.

Your average tenure managing your credit accounts is referred to as your credit history. Credit histories that are longer contain more data, making them more predicting of future behavior. Because they don’t have a track record, consumers with recent credit histories don’t frequently achieve extremely high credit scores.

How to improve: Time is the only thing that can truly increase your credit history length rating. However, you can help yourself by keeping old credit accounts open, even after you’ve paid them off! Make at least one purchase per month on your active, dormant credit cards. Even $5 worth of purchases is helpful.

How is My Credit Score Determined?

Data from all three credit reporting bureaus are combined to create your credit score. Your scores should be similar, though each bureau may give you a slightly different score depending on which lenders, collection agencies, and courts record information to them. The following is a rough breakdown of how credit bureaus calculate credit scores:

• Payment history (35%):Your payment history takes into account things like how frequently you make or miss payments, how long on average your late payments are past due, and how quickly you make an overdue payment. Your credit score suffers each time you miss a payment.
• Current loan and credit card debt (30%):Your current debt is made up of several things, including how much you owe, how many and what kind of credit cards you have, and how much credit you have available. Credit card balances that are maxed out and large loan balances lower your score, whereas small loan balances that are paid off raise it.
• Length of your credit history (15%):Your likelihood of continuing your current credit patterns increases with the length of your credit history. Long-term on-time payments raise your rating.
• Account diversification (10%):Creditors prefer to lend to borrowers who have a variety of account types, such as installment loans, credit cards, and home loans.
• Recent credit activity (10%):Creditors might assume that you’re having financial problems if you open a lot of cards or ask for a sudden credit increase. Applying for several accounts at once could damage your credit, so refrain from doing so.

FAQs

Summary: Take Control of Repairing Your Credit Score

It’s a good idea to work on enhancing your credit whether you’re attempting to finance a home or obtain another type of loan. Although improving your credit score won’t happen overnight, there are many simple steps you can take each day to raise and keep your score in good standing.

To recap, here are some ways to get started:

1. Look for errors in your credit report and frequently check it.
2. Focus on making small, frequent payments, and exercise financial restraint.
3. Reduce your high-balance accounts, and only occasionally use credit cards.
4. Take into account a debt consolidation loan.
5. Participate in credit counseling services.
6. Work to increase your credit score.

Read about

• How Much Does It Cost To Buy A Star? 
• How Long Does It Take to Buy a Car?