Fast Credit Score Fixes to Qualify for Best Mortgage Rates --SPONSORSHIP
With homes at near-bottom prices and interest rates at historic lows, a lot of consumers are jockeying to get into the homeowners market or to refinance their standing loan. But there's one catch: Getting approved for the best interest rates relies on your credit score.
Typically, a credit score of 720 or above is the bar for qualifying for the best interest rates. Many borrowers, who fall below goal, may think there's nothing they can do to improve their credit score, especially in the short-term, but that's a myth.
While there's no quick-fix magic to erase the score, a borrower -- even with high levels of debt and a history of delinquent payments -- can start improving his or her score in immediate and dramatic ways.
Contrary to popular belief, it's actually the people with low credit scores that have a better opportunity to improve, says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. Credit scores range anywhere from 300 to 850, and due to the law of mathematical averaging, it's much easier to see a jump from a starting point of 300 than from 800.
Scores can fluctuate quickly because most lenders update the credit bureaus on a monthly basis. But the amount the scores change is a little more complicated and depends on a series of factors, from your amount of available credit to paying your bills on time to the length of your credit history.
To help you see a bounce in your score and land a step closer to obtaining an affordable home mortgage, AOL Real Estate talked to some financial experts to find out some fast ways for consumers to address a less-than-desirable credit score and to start seeing results:
Tip No. 1: Pull your credit score
Before shopping for a home, you need to know your exact credit score. According to Joel Ohman, a certified financial planner and founder of CreditCardChaser.com, around one-third of consumers have errors on their credit report and simply by pulling it, you can rectify those mistakes. Every year through the site annualcreditreport.com, you can get your credit report for free, and any inaccuracies can be reported to the credit agencies and corrected. Ohman says depending on the flub, this could cause your score to spring 25 to 50 points.
You should see this adjustment reflected in your credit score before you apply for a home loan. Cunningham advises allowing at least 3 months time to check your credit report before applying for a mortgage. This allows for the time it takes to deal with the credit bureau, provide documentation, and then to see your score updated.
Tip No. 2: Pay down your debt
Before you take on a mortgage, you need to show lenders you can manage credit responsibly. About 30 percent of your credit score is based on your available credit, which can be figured by taking the total of your credit card balances divided by your total credit card limits. As you start paying down your debt and continue to do so over time, you are going to see your credit scores bounce.
But if you are saving up for a bigger down payment or to do a cash-in refinance, you may not have the spare dollars to completely wash away your liabilities. If this is the case, then try to get as close as possible to the recommended level. Typically experts suggest consumers use 20 percent or less of their available credit.
Tip No. 3: Piggy-back on good credit
Lenders are scrutinizing credit reports more carefully than ever, so it's important to target the accounts they'll be most concerned about. Another strategy to enhance your scores is to utilize the good credit of a significant other, a relative, or a very good friend, says Cunningham. Get added to a credit card as a joint account holder, and as payments continue to be made --on time, your credit scores will increase. For example, if a husband with good credit adds his wife to his account, his history will be imported into her credit file and in effect, raise her score.
The downside is that if she continues reckless behavior from before, that will hinder his score, as well, and consequently, an combined lower credit score may jeopardize both of your chances for getting a better interest rate on the home loan.
Cunningham says another way is to use a secure credit card, a credit line that requires a cash collateral deposit. This means you put a $1,000 in cash down for a credit card and then you can charge up to exactly that amount on the card. The purpose is to have the issuing lender reward you for using the card and report back to the credit agencies. Just confirm before arranging for the secure card that your lender is going to report your payment history to the credit bureau.
Tip No. 4: Attempt to increase your credit limits
Most mortgage brokers say you should stay financially static during the application process and avoid starting an new credit lines. But your score can actually benefit from increasing your credit limits, part of the equation that determines your percentage of available credit. If you have been a responsible owner of a credit card, you may consider asking the issuer if they will raise your credit card limit.
However, this should not be confused with opening new credit cards and lines of credit, which could have an adverse effect on your credit. "Someone opening five or six credit cards at one time may have a budget problem," says Ohman. "In the short term, it could be seen as a negative."
Opening up credit -- such as applying for multiple credit cards, a car lease, store cards-- around the time you apply for a home loan can compromise your position as a borrower.
Tip No. 5: Don't continue to pay bills late
Forgo the defeatist mentality, because starting to pay your bills on time can start to correct your dismal credit score. About 35 percent of your credit score is based on whether you pay your bills on time. You just have to meet the minimum by the due date.
For those who are already homeowners, paying bills on time also includes your current mortgage payment. Scott Gamm, founder of the Web site, helpsavemydollars.com, says that bankruptcies and foreclosures can cause your credit score to drop 150 to 200 points and that this discrepancy will be a fixture on your credit report for the next seven to ten years.