Did you set a goal to purchase a home by the end of 2019? If so, you may still be able to accomplish that goal even if your credit needs a little fine tuning. What you’ll need to do first, however, is a mid-year credit check.
It can take months to bring about meaningful changes in your credit scores, and sometimes years if major changes are needed. It pays to start working on your credit rehabilitation as soon as possible when you’re considering a major purchase, like a home. Every basis point you can shave off your interest rate on a long-term installment loan is real money that you’re not having to pay to a lender every month.
Although every situation and every credit report is different, here are three tips that may help you prepare your credit for a mortgage by the holidays.
1. Review Your Credit Reports and Scores
It’s important to understand what your credit reports looks like right now if you hope to purchase a home by the end of the year. Checking your credit will let you know whether you could potentially qualify for a home loan now, or whether you might face a denial of a mortgage application. Even if you can qualify, a poor credit score could cause you to pay a higher interest rate and larger monthly payment.
You’ll need to check your credit reports with all three of the major credit bureaus — Equifax, TransUnion and Experian. After all, that’s what a mortgage loan officer will do when you officially apply for your mortgage. Don’t worry: Checking your own credit reports will NOT damage your credit scores. That’s a myth.
Finally, if you discover errors or mistakes on any of your credit reports, you should dispute them with the credit bureaus. Errors might damage your scores or make it harder to qualify for a home loan. They should never be ignored. Plus, the investigation process can take 30 to 45 days under normal circumstances, and much longer if you have to try more than once to get a mistake corrected.
2. Pay Attention to Your Credit Card Balances
Credit scoring models, FICO and VantageScore, are designed to pay close attention to something known as your revolving utilization ratio, sometimes referred to as the credit utilization ratio. Credit utilization is the relationship between your credit card limits and your credit card balances.
If you’re preparing for a mortgage, your goal should be to keep your credit utilization ratio as low as possible.
As the card balances on your credit reports get higher, you use a larger percentage of your credit limits. This causes your credit utilization to go up, and that’s not good for your credit scores.
If you’re preparing for a mortgage, your goal should be to keep your credit utilization ratio as low as possible. That might mean paying off credit cards and shelving them for a month or two, as the balances that appear on your credit reports are the same as were on your most recent statements.
3. Be Vigilant About Late Payments
The final tip isn’t so much a credit “do” as a credit “don’t.” Anytime you’re preparing for a major purchase and you plan to take out a loan, you need to avoid late payments. In truth, you should always avoid late payments as far as your credit scores are concerned but you really need to avoid them before a loan application.
About one third of the points in your FICO and VantageScore credit scores are based on your payment history. It’s safe to say that late payments can potentially be detrimental to your credit scores.