If you’re thinking about buying a house this year (or any year), you know that you’ve got to have passable credit, at minimum, to qualify for a home loan. You can have a solid down payment and a long history in your current job, but none of that matters if you can’t actually qualify for a mortgage.
Most of the paths to great credit scores are long and arduous, but here are a few tips to help you repair your credit quickly. Remember, these will not help everyone in every situation, but if they apply to you, you could quickly see your score climb.
1. Pay off your current debt
For some reason, a lot of people believe that to have good credit, you have to keep carrying debt on your credit cards indefinitely. This is one of those personal finance urban legends.
What is true is that you need to use them periodically, but that can be something as simple as using your card to pay for a monthly subscription fee or a week of groceries, and then paying it off immediately. It’s called paying in full, and when I moonlighted at a credit card company during a particularly slow real estate winter, those were the customers who were the most highly sought after.
If you’re carrying a balance, pay that off now. Pay it off today, as long as it leaves you with enough money for your down payment and closing costs. Not only will that help improve your debt-to-income ratio, but it will reduce the amount of money in the category FICO calls “Amounts Owed.” (It’s also referred to as “credit utilization” in other places.)
If you can get close to zero, that’s absolutely gold. But, if you can even pay your debt down to below 30% of your total credit limit, you’re definitely in the silver category.
But wait, not necessarily your collection accounts
It’s important to pay down your consumer debt as quickly as you can if you want to fix your credit fast, but that doesn’t mean you need to pay off your collection accounts, if you have any. This is a question for your lender (and depends on which credit scoring model it uses), so do not attempt to decide which collection debts to pay off on your own. Some could help you, but some may not, and that would just be throwing good money after bad.
2. Close newer credit lines
If you’ve paid down most of your debt, the next thing to do is to close your newest credit accounts. This is because the length of your credit history is based on an average of the age of each account. So if you have a loan that’s 15 years old, and a credit card that’s eight years old, and another that you opened a year ago, your average credit age is eight years.
If you close that one-year-old account, your average credit age goes up to 11.5 years. The one caveat would be if that newer credit line has a high limit, which can then raise your credit utilization ratio (which could negatively impact your score).
Although length of credit history only accounts for 15% of your credit score, it’s one more powerful move you can make that takes almost no time to improve your credit score dramatically.
3. Ask your lender if nontraditional credit lines can be included
If your credit is lagging because you just don’t have a lot of credit experience, ask your lender if it can include credit sources like utility bills, insurance payments, and other regular payments that aren’t really optional. Sometimes, you can do this yourself using a credit-boosting product from the major credit bureaus, but asking your lender directly will be the most efficient way to change your credit reporting for the better.
The lender may ask for references from credit sources that you identify as options, which can sometimes be used to supplement a very limited credit file or build one from scratch if you’ve never used credit before. Your credit score will then be adjusted accordingly, based on how your credit references respond to the query. They report on the same factors you’ll see on your credit report, including how well you make your payments.
Your best bet for great credit before buying a home?
I’m not here to nag you or tell you how to do things, but really, if you’re thinking about buying a house, you should spend a lot of time in the thinking stage. Spend this time working on saving as much money as you can, get used to putting aside money for repairs that your home will ultimately need, and also get your credit profile in order during this window.
If you already have a lender in mind, connect with it today and ask for a credit review, so you can qualify for a loan on your timeline. Or ask the lender what a realistic timeline is. Loan officers worth their salt aren’t just in it for a loan closing today, they want them tomorrow, and in five years, and so will help you as much as time allows them to do.
I was a real estate agent for a decade, and I promise you, my lenders went out of their way to help first-time home buyers get into their first homes. If the lender you pick won’t at least talk to you about how to improve your credit file, find one that will. Much of what you’ll hear, though, is that time heals all wounds — even credit wounds — provided you don’t make the same mistakes again.
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