If you are thinking about buying a home or refinancing your existing home, you probably are aware that your credit record can affect your mortgage options. As we explained in our previous post on credit score basics, credit records are one way that lending companies determine whether or not to lend money. Credit records can also be a factor in other transactions as well, including starting a cell phone contract, turning on utilities, and sometimes even when applying for a job.
In order to maintain good credit, it’s important to understand what information credit bureaus consider when calculating a credit score. Whether you are planning to apply for a mortgage in the next few months or not for several years, it’s never too early to start working on improving your credit score. Below are a few tips you can use to help establish and maintain a good credit rating.
Use Credit Cards Responsibly. You don’t need to carry a balance on your credit card, but having some purchasing power by means of a credit card is a good thing for your credit. Choose a card that reports to all 3 credit bureaus for the best results. If you don’t qualify for a traditional credit card yet, get a secured credit card until your score improves. (You may also be able to get a credit card through your bank if you have a history of banking and payments with them.) If you already have credit cards that are maxed out, pay them off. Lenders like to see that you have at least 70% of your credit card balance available at any time. Once you get your card balances down, keep them down to see your credit score continue to rise. Keep using old accounts to keep them current, but pay them off in full when you do.
Take Advantage of Installment Loans. Along with revolving credit, lenders like to see that you are able to manage longer term debt, like an installment loan. These are accounts like car loans, mortgages, and student loans. Having an installment loan with a history of on-time payments shows the credit bureaus and potential lenders that you are able to pay off your debts.
Fix Negatives. If you have made a mistake or two on a long-standing account (for example late or missing payments), but your recent history has been better, you can try asking to have the negative information removed from your credit report. Many lending companies don’t mind doing you the favor if your account is in good standing and you’ve been a loyal customer.
Following these tips can put you on the road to good credit and better position you to have more options when it comes to buying a house or refinancing. In general, it is important to use credit wisely and have enough to prove that you can make timely payments but not so many that lending companies will see you as over-extended.