Get Your Credit in Shape before Buying a Home If you are looking at purchasing a home, the first thing you need to do is look at your credit report and find out what your FICO score is. "The credit score is really the key to your financial life, and we're not just talking about getting credit," says Travis Plunkett, legislative director of the Consumer Federation of America. Your FICO score will partially dictate whether or not you can qualify for a loan and will definitely make a difference in what sort of interest rate you are able to get. If you want a great rate, your FICO scores must range from 680-800.
The truth is that no one knows exactly how your FICO score is calculated, but we do know the basics. Credit scores range from 300 to 850 and are based on the following:
- Payment History 35%
- Amounts owed 30%
- Length of credit history 15%
- Types of credit used 10%
- New Credit 10%
If your score could use a little improvement, you can increase them by being aware of what makes credit agencies consider you a risk and lower your score. Manage your finances carefully and you can increase your score without too much effort and avoid pitfall to making it crash.
Pay Your Bills on Time
Your biggest concern should be your payment history. "It's the most important element because it shows how you repaid debt in the past," said Craig Watts, a spokesman for FICO. "The score looks at long-term behavior to predict long-term behavior." In other words, don't make late payments if you don't want your score to plummet. In fact, the best way to get your score to climb is to pay everything on time and do this consistently. It makes you look like a model citizen who is likely to make their loan payments.
Take Care How Much Revolving Credit You Have
Avoid opening numerous new credits accounts at once. All those cards with great interest rates you get offered through the mail may look fantastic, but if you apply for a few at once, your credit score will drop. Increased activity like this is read as a person that may be in financial trouble. The cards that you do have should have balances well below the limits. Credit cards that are all but maxed out also look like the sign of someone about to find themselves in financial difficulty. Surprisingly, it is also a bad idea to pay off all your credit cards at once. The elimination of a bunch of accounts will lower your score, especially if you close them. Part of your score is dependant on your credit history and closing down the cards you've had the longest can adversely affect the length of your history.
Rebuilding Wrecked Credit
If your credit is in such bad shape that you can't even get a credit card, you can still rebuild it. The process will just take longer. Start with a secured credit card, a card that is backed up by a savings account. The information involving your timely payment will get reported to the credit agencies just like a normal credit card and your credit score will begin to increase. You can follow this with a department store credit card, which are usually fairly easy to acquire. Just take tremendous care that you make your payments on time and keep your balances low so that you keep yourself out of trouble.
Track your credit score annually and be aware of your score. If you are careful to make financial decisions that will increase your credit your score will shape up fairly quickly. The trick is simply being educated and responsible.
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