Buying a home isn’t easy. First, you select a neighborhood where you want to live. As a part of this process, you’ll need to research schools, your commute, and much more. When you begin working with a realtor and searching for a home, you’ll be competing against other buyers, which can mean that you’ll have to place offers on multiple properties.
Of course, we left out a very important step: Applying for a mortgage. As a part of the mortgage process, you will have to provide a range of documents, from your bank accounts and tax returns, to proof of your income. And of course, you’ll need to demonstrate a good (ideally great) credit score, so that you can obtain the most competitive mortgage interest rate possible.
Even a small difference in your mortgage interest rate can cost you thousands of dollars, in a pretty short period of time. For this reason, it’s worth considering a few methods through which you might enjoy the best credit score possible.
1. Check Your Credit Report For Errors, And Inacurate Negative Credit Items
As we’ve noted before, the biggest killers of credit scores are negative items, such as late payments, collections, and repossessions. If you see any such items on your credit report, which are clearly in error (i.e. the collection is not yours, or you did not pay late, or it’s been more than 7 years since the negative event happened), you’ll want to submit a written dispute to the credit bureaus, informing them that this item has been reported inaccurately, and needs to be removed.
If that does not work, you should contact the creditor or debt collector directly. If the issue still has not been resolved, you should speak to a consumer rights attorney. You might have grounds for a lawsuit.
Given the frequency of errors on credit reports, it’s very common for items to appear on your credit report, which should not be present. In your dispute, you should include the account name, number, and the reason why the account is being reported in error (i.e. it does not belong to you, or it is too old). If this does not resolve the issue, you should write directly to the creditor or debt collector who placed the account on your credit reports, and point out the errors. At that point, if the error has not been corrected, you might have grounds for a lawsuit.
In other cases, a negative event isn’t reported in error. It did actually occur, and it is harming your credit score. In these instances, there is still a decent chance of having an item removed from your credit report.
Under the Fair Credit Reporting Act, anything which appears on your credit report must also be accurate, verifiable, complete, and timely. If these requirements are not met, the item must be removed. Quite often, negative items on your credit reports might be accurate, but are not complete and verifiable, and can thus be removed.
When addressing credit reporting errors, you can either work through the process on your own, or make use of a credit repair company. If you’re going to hire a credit repair firm, make sure that they have the proper expertise, and are transparent in terms of their pricing. There are some good credit repair firms out there – but also many bad actors.
2. Reduce Your Credit Card Balances
The amount of debt you carry accounts for 30% of your FICO score, with your credit card debt being a crucial part of that number. In order to maximize your credit score, you’ll want to always keep your credit card balances below 30% of your credit limit, for each credit card. So, if you have 3 credit cards, each with a $1000.00 balance, you’ll want to make sure you never carry a balance of more than $300.00 on each card.
Even better, if you show a very small balance on one card (i.e. 1 to 5% of your credit limit), and $0 balance on the others, you’ll further maximize your credit score. So, back to the example above, if you can maintain a balance of no more than $30 to $150 dollars on one of your cards, and keep a $0 balance on the other cards, your score will further benefit. By doing this, you’ve shown not just that you have credit cards, but that you’re effectively managing your credit history.
Please note that when we say “show a balance”, we don’t mean spend on the card each month, and carry a balance (which you pay interest on). Rather, you should plan to spend a small amount on the card, around the time that your statement on the card is generated, and then pay off this amount when the card is due (so that you don’t have to pay interest). If you look at the date when your credit card statement is prepared, and have some sort of balance a few days before (on at least one card), you should be fine.
Lots of people wonder whether reducing balances on their installment accounts (i.e. student or auto loans), will help increase their credit score. The answer is: possibly, but not much. Your revolving account debt counts for much more of your credit score, than your debt on installment accounts.
Thus, reducing credit card debt will have a much greater impact on your credit score. If you have a newer installment account (i.e. one where 80% or more of the balance remains), you might see an improvement to your credit score by reducing the balance a bit, but the overall impact is quite small.
3. Become An Authorized User On A Credit Card
Do you know someone who has had a credit card for at least the past two years, with an excellent payment history (no late payments in the past 2 years) and low debt on the card (i.e. below 30% of the limit)? If so, ask this person to add you as an authorized user on the card.
By doing so, you’ll be able to enjoy the benefits of their positive credit behavior, which can help to boost your credit score. They don’t have to physically provide you with the card, or access to the account. Rather, by simply having your name appear on the account, you’ll see some benefit to your credit. Remember, don’t buy authorized user tradelines. Rather, find someone in your family or friend circle, who has a strong credit score, and have them
Final Thoughts
Enjoying a strong credit score, is the product of years of consistent positive behavior. It isn’t something which simply happens overnight. However, if you want to buy a home, and need to improve your credit scores in the short to medium term, the steps above can help you get where you want to go.
