It plays a critical role in your ability to qualify for a mortgage. Credit scores are intended to be shorthand for both your willingness and ability to pay your debts. If your credit score needs a little help, here are a few ways to prove your financial responsibility before applying for a home loan:
Make Payments on Time
According to one source, payment history has the largest impact on your credit score. Making payments on time every month shows both willingness and ability to pay and has a big impact on your score. If you are having trouble with this due to being disorganized (rather than a lack of cash) you can use automatic bill pay through your bank to help resolve this issue. Use technology to your advantage and pay your bills on time—you can set up automatic payments, set reminders on your phone, mark an e-calendar that sends you alerts, etc. Do whatever works to help ensure all your bills are paid in full, and on time.
Clear up Overdue Debts
This is part of your credit history and is at least equally as important as making payments on time. If you haven’t yet paid off past creditors, why should new creditors be willing to give you anything? Find a way to make this right. Whether you bump up your monthly car bill by $50, or you dip into your savings to pay off student loans, do your best to clear up overdue debts in order to help your chances with lenders in the future.
Pay Down Debt
Another big impact on your credit score is how much you owe, relative to your income and relative to how much available credit you have. If that figure is looking bad, then paying down debt without running up new debt is the next most important thing you can do. It will improve that ratio and can also improve cash flow, so that there is more room in the budget for a house payment.
Get a Good Credit Card and Use it wisely
If your credit is so bad that you no longer qualify for a credit card, after you have taken some basic steps to improve your score, get a new credit card and learn to use it wisely. It may be counterintuitive, but this can be one of the best ways to raise your rating. You will be able to build good credit when you display good habits with your new credit card. Just make sure you pay it off in full every month, and of course, on time!
After your credit score has been put on a firmer footing, you can try to pre-qualify for a mortgage. Doing it too soon can hurt your score. But not having a mortgage pre-approved can complicate the process of buying a house. You can talk to a realtor about the best time to take this important step, or meet with a financial advisor to review the state of your credit and how to improve it further. When you work to change your financial habits, and start to take responsibility for your credit, you’ll be ready to take the next step and successfully shop for a home loan.
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