Your credit score is an important factor when buying a new home. Whether you've just received your first credit card or have been building credit for years, there are a few things you should know to help you achieve a high credit score.
Checking your credit is something everyone should do yearly. One of the best times to check your score is after you've filed your taxes. The three big credit bureaus Equifax, Experian, and TransUnion all provide top-tier reports that banks, landlords, and other loan officers will all regard as accurate. Many companies will provide a free credit report from each of the big three bureaus once per year.
Aside from the big three, there are dozens of online credit reporting companies that will also provide you with a credit score. Your bank may also offer some variation of a credit score. It's important to note that your bank's score may be calculated using different methods and processes than those by the big three credit bureaus. While you may have a great score with your personal bank, you need to make sure that your score with the big three is similar.
Short-Term: 3 - 6 Months
After you know what your true credit score is from one of the big three bureaus, you can now work to improve it. Breaking down the credit process into short-term and long-term goals can help you maximize your time, so you can boost your score. There are several things you can do to help boost your score in the next few months. These short term goals are essential to get your score back on the rise while you work towards long term improvements.
Dispute Derogatory Remarks
Your credit score will list any liens, loans, or problems associated with your credit history. Sometimes there are derogatory remarks listed on your credit report because of mistakes or balances you do not owe. You have the power to dispute any derogatory remarks and the credit agency will remove the remarks until the reporting company provides proof of the debt. If the reporting company does not respond timely then the derogatory remark is permanently removed from your credit report.
In addition to disuputing remarks, you can check for any outstanding balances and contact the associated company to clear up the problem. Removing any outstanding remarks from your credit history is one of the best ways to improve your score, and it can be done quickly.
Written Agreements Before Paying Collections
Often times when paying off old accounts, the collections company will accept payoff amounts as little as half of the original balance. Negotiate with the creditor to get the most favorable payment amount.
Now that you've contacted the companies and are ready to pay off your outstanding loans, it's important to get a written agreement before transferring any money. Often times, people will simply send off overdue payments to collection companies and expect their score to improve. In reality, these collection companies may take the payment and neglect to remove any negative remarks. You should always get a written agreement stating that all derogatory or negative remarks will be removed from your credit history upon payment of any outstanding balances.
Reduce Credit Utilization
Another simple and effective way to boost your credit score is by lowering your credit utilization. Credit utilization is the ratio of how much credit you use when compared to how much credit you have available. For instance, if you have three credit cards each with a $1000 maximum limit, and you currently have a balance of $500 on each card, your total utilization is $1500 out of $3000 possible, or 50%.
Lowering your credit utilization to 25% or less will help show creditors that you do not rely on credit and, in turn, will increase your score. This can be done by either maintaining a lower balance on your credit or by increasing the credit limit on your already open accounts. You should avoid opening new accounts to increase your credit limit, because opening new accounts reduce your history's "average age", which could lower your credit socre. Paying down your open balance is really the strongest way to reduce your credit utilization.
Long-Term: 2 - 5 Years
Looking farther down the road, you'll want to make an overall lifestyle change to reach those high credit scores. These long-term goals are things you should start doing today, but it will take years of consistent behavior before they will impact your credit score.
Pay All Bills On Time
One of the best methods to increase your credit score is to pay all your bills in full and on time. In particular, all debt (i.e. credit cards, mortgages, and car loans) should be paid immediately each month.
Paying your bills on time will usually take 2 years of consistency to have the best impact on your credit. However, showing creditors that you can reliably make payments is a great way to boost your score.
Take An Installment Loan
Installment loans are a fixed amount of money that you pay back on a regular schedule each month. A good way to improve your credit is to simply have an installment loan that you have paid back reliably for several years. Most people already have an installment loan in their credit history, whether from a car loan or personal loan, but if you do not have an installment loan it can be helpful to get one.
A smart way to take an installment loan is a debt consolidation loan, this allows you to consolidate all your existing debt into one montly payment that you can pay off in installments. This approach doesn't harm your credit utilization, while boosting your credit score long term
Whether you've been working on your credit for years or just started, you can control your score. Paying off loans on time, removing negative remarks, and monitoring your score will make a big impact.