You probably know that the better your credit score is, the bigger and better the loan you will qualify for. But do you know what goes into the credit scoring model and if your credit has suffered in the past, how to get it back in shape so you get the best loan possible?
We all know bad things happen to good people, in fact most everybody has had there credit damaged at one point or another for various reasons. The biggest reason is the big "D," followed by death or injury of a wage earner and finally unexpected medical bills. All of these are unfortunate things and cannot be avoided (short of not getting married or working!), it's how you choose to recover from your bad credit that will affect how fast you qualify for a home loan.
1. The first thing to remember is your credit score is a constantly changing equation that produces a number to gauge risk. Basically, the higher you score in the equation, the better your chances of qualifying for a loan and the less risk you pose to your lender. This is good for you because you can make instant changes to your financial picture and instantly change your credit score. Empowering right! It does not take forever to repair credit, depending on how fast you move.
2. The biggest contributor to your credit score is your payment history, particularly over the past two years. The longer you have a tradeline reporting with no lates, the better your score will be. NEVER CLOSE ANY CREDIT ACCOUNTS BECAUSE YOU DON'T USE THEM OR THEY HAVE A ZERO BALANCE. Closing these accounts will hurt your score because you are eliminating positive payment history from the report. If money is tight try and make the minimum payments on your cards, maintain that history, you can pay the balance down later when your finances get better.
3. The second most important part of your credit score is the relationship between what debts you owe and your total credit limit. The closer you are to the limit on a credit card or installment loan, the more damaging it is to your credit. For example, it is a much better idea to keep several low balances on several credit cards then it is to keep one large balance on one credit card and nothing on the others. You are most rewarded for keeping a balance as close to 30% of your limit as possible if you are carrying any debt. If you have a low credit score, try moving some debt around to your other cards and reducing each of your principal balances. You will begin to see instant changes in your score and most credit card providers will even do a 0% balance transfer for you for a set period of time!
4. Many people are not aware that having different types of credit on your report has an impact on your credit score. Having several types of credit such as a credit card, installment loan and mortgage on your report will improve your score because it shows you can be responsible with all types of credit. If you are attempting to rebuild your credit, opening a new tradeline may be a good way to increase your score quickly.
5. Decide where you want to apply for credit and stick with it. Please do not go shopping around for credit if you are denied in the first place. If you are hearing you do not qualify from more than one company, it is you, not them. Find a certified credit counselor or credit expert and not a service that promises credit repair by establishing a monthly payment plan, and work with them. Every time a lender pulls your credit is has an impact on your credit score. You are allowed to shop within the same industry over a 30 day period without being penalized. If you are denied do not keep trying and trying, you will damage your score more. Follow the tips outlined in this blog and work diligently, credit repair is possible for anybody!
If you have further questions or comments on repairing your credit please contact me and I will assist you or refer you to an expert in the field.
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