It’s no secret you need appreciable credit to buy a house, but building and maintaining a good credit score is a major homebuying hurdle for some homebuyers, especially first-timers, according to a new TransUnion Survey.
Thirty-three percent of Millennials respondents want to buy a home in the next year, but 30% of Millennials have a credit score between 300 and 600. According to Experian, the Millennial age group has an average score of 625, while the national average is 667.
While credit doesn't get damaged overnight, there are some actions you can take to help boost your score in a timely manner. Here are a few ways to get you headed in the direction of healthy credit.
Dispute Errors on Your Credit Report
Mistakes happen even on your credit report, so make sure to get a yearly copy from the three credit reporting agencies, Equifax, Experian and TransUnion to look for errors. Contact your creditor with any errors found.
Check Your Credit Limits
While you're looking at your credit report, pay special attention to the reported credit limits of yoru accounts. Credit utilization accounts for 30% of your credit score, so if your creditor is reporting a lower than actual credit limit, it will appear that you are using a higher amount of your credit line.
Minimize Your Balances
Because credit utilization accounts for so much of your credit score, one of the best ways to boost your score is to pay down balances. Make a goal to pay more than the minimum payment or make two payments a month to pay down that debt at a faster pace.
Negotiate With Your Creditor
While a late payment is a late payment, many creditors are willing to negotiate when it comes to a customer who normally has an account in good standing. Perhaps you fell behind on some bills and were late on a couple payments, it doesn't hurt to call your creditor for a "good-will adjustment" if you've been an up-to-date customer in the past.
Keep Your Zero-Balance Cards Open
While closing a zero-balance card will remove temptation from racking up a balance, getting rid of it altogether may decrease your score for several reasons. Closing your account lowers the amount of revolving accounts and decreases your total amount of available credit. If it's an older account, it can also shorten your credit history, another factor in determining your credit score.
Mix Up Your Credit Types
It's important to have a healthy mix of installment and revolving credit accounts. If your credit picture only contains credit cards, consider buying something small (i.e. a piece of furniture or appliance) on an installment account to show that you can be a responsible borrower with both types of credit. But only do so if you're sure you can make the monthly payments.
Pay On Time
This one is a no-brainer. Payment history accounts for 35% of your credit score. While a couple late payments do not automatically destroy your score if your overall history is good, your FICO score considers how late your payments were, how much was owed, how recently they occurred and how many late payments were made. If you're prone to forgetting, sign up for automatic payments a few days prior to your bill's due date.
Meet With Your Lender
Some homebuyers have preconceived notions about credit and homebuying, including what credit score it takes to get a mortgage and what their credit score actually is. To determine your credit score, lenders use your median score from the three national credit bureaus TransUnion, Experian and Equifax.
If you use an online credit check, oftentimes only one of your three credit scores is represented. This could mislead you into thinking your credit score used for home financing is lower than it actually is.
If you wish to buy a home, meeting with a lender is the first step. They’ll go over loan options and may be able to perform a rapid rescore to give you options for raising your score to meet loan qualification standards.
Remember that your credit score wasn't damaged overnight, so don't expect it to improve overnight either. Years of past credit behavior are taken into account to determine your number. It's impossible to determine how one specific action will affect an individual's score, but the above recommendations will help keep you on the right track to better credit. Be patient and persistent.
If you're preparing to buy a home or are currently in the home financing process, remember to consult with your mortgage banker before making any decisions regarding your credit so you don't offset the financing process.
For more information about credit and home financing, download our free Mortgage 101 Handbook for everything you need to know about the home buying and financing process.