There was a time, not so long ago, when a credit score of 720 would have been enough for you to be approved for the best mortgage rates. That’s history. In today’s economy, you need to post a score of at least 760 (out of a possible 850) to be considered for those desirable interest rates, for a conventional loan. Plus, the FHA loans are more lenient with credit scores. You can qualify for an FHA loan with a credit score of 640.
It doesn’t take much to chip away at your credit score. Here are five tips to preserve your creditworthiness.
1. Avoid making late payments.
Even one late payment, whether it’s a week or a month, can cost you up to 110 points on your credit. Pay attention to due dates and, whenever possible, pay early.
2. Keep your balance low.
While you need to use your credit to build a history that lenders can view, don’t overdo it. Your total debt should amount to no more than 30 percent of your income. Carrying a big balance will send up a red flag to a potential lender. Pay down your balances and you should see a boost in your score.
3. Keep your credit cards, even if you’re not using them.
You might think you’re doing the smart thing by reducing the number of credit cards you’re carrying, but cancelling cards changes your debt to utilization ratio. If, for example, you have three credit cards and each has a $2,000 limit, that’s a total of $6,000 in available credit. Let’s say you are carrying an $800 balance on one card and zero on the others. Your debt to utilization ratio is 13.3 percent, and that’s a good number. But if you cancel those other two cards, you reduce your total available credit to $2,000 and your debt to utilization ratio soars to 40 percent. You’re better served to tuck those cards away and not use them rather than cancel the accounts.
4. Don’t open new credit lines.
When you apply for a new line of credit, the company checks your credit report, and this inquiry automatically lowers your score a bit, maybe by five points. In addition, once you open the account, you could be sacrificing up to another 15 points until you prove yourself worthy by managing this credit wisely. Don’t collect credit cards; apply for what you need and avoid the temptation to accept more.
5. Don’t default on a loan.
No one wants to default on a loan, but it happens. Home foreclosure could cost you 90 points and bankruptcy can take away as much as 250 points! If a default is unavoidable, start rebuilding your credit as soon as you can, by following the first four tips.
Don’t let your dreams of home ownership be crushed by a low credit score. If you need advice, talk to us at Stylecraft Builders. We can help get you back on track!