You're ready to buy a new build home and obtaining a mortgage is a crucial step in the purchasing process. To obtain a mortgage, you must meet several requirements. We’re going to focus on one of those requirements— the credit score.
Your credit score shows how well you’ve handled debt and ranges on a scale from 300 to 850. Most people’s score lands between 600 and 750. The score you need to secure a loan depends on the loan type. A conventional loan requires 620 or higher while an FHA loan requires 580 or higher.
Building up your credit is no simple task. If you find yourself falling short of the credit score needed to secure a loan, there are a few ways to give your number a boost. Here are five proven ways to build your credit score.
1. Control Your Credit Utilization
Credit utilization is the second largest factor when calculating your credit score. That’s why it’s an effective strategy when it comes to boosting your score. Credit utilization ratio is the money owed on your credit card divided by the limit on your credit card. For example, if you owe $500 on a credit card that has a $1,000 limit, then your ratio is 50 percent. It’s an indication of how well you handle your finances. A low ratio means you have good control over your finances while a high ratio indicates the opposite.
In essence, you want to keep the ratio low when the card issuer reports your balance to the credit bureaus. To achieve this, you’ll want to lower the card balance before the end of the billing cycle. Ideally, a higher limit lowers your credit utilization ratio and increases flexibility. It is not to pay for consistent financial emergencies.
2. Increase Your Credit Limit
Another way to lower your credit utilization ratio is by increasing your credit limit. Earlier, we mentioned that owing $500 on a credit card with a limit of $1,000 would produce a credit utilization ratio of 50 percent. Owing the same amount on a card with a limit of $5,000 would produce a ratio of 10 percent.
While a higher credit limit sounds enticing, it comes with potential drawbacks. Make sure you’re resolute in your reasoning to increase your limit. Ideally, you should want a higher limit to lower your credit utilization ratio and increase flexibility, and not to pay for consistent financial emergencies.
3. Dispute Errors On Your Credit Report
Inaccurate information on your credit report could significantly impact your ability to receive a loan. Common errors include incorrect identity information (such as name or address), balance errors for accounts, or incorrect reporting of account status. You are entitled to free credit reports from the three major credit bureaus, so checking your report regularly is easy.
To dispute an error, you’ll want to write a letter to the credit reporting company explaining the error with documents to support your claim. Once you’ve filed your dispute, the company will investigate and either fix or keep your information. Inaccuracies can dramatically lower your credit score, so it’s important to keep that information as truthful as possible.
4. Receive Credit for Regular Payments
If you’re making regular payments for things such as rent, utilities, or streaming services, then you can use them to benefit your credit score. Rent reporting services will add your on-time rent payments to your credit report. However, be aware that not all credit reporting companies accept them. Experian Boost offers a similar capability by linking to your bank account and scanning for consistent payments.
5. Pay Your Bills On Time
No matter what strategy you employ, nothing is going to help your credit score if you’re not paying your bills on time. After all, this is the largest factor when it comes to calculating your score. And, don’t just pay the minimum amount every time. Late payments can remain on your credit report for up to seven years.