If you are a young person just starting out in the working world, your ability to finance and purchase a home will depend upon a number of factors; one of which is your credit score. If you do not have credit established, it can take some time, so it’s best to start early. If you have established credit but it has been marred by a divorce, job loss, or health event, you should start as soon as possible to re-build your credit to position yourself to buy a home.
Here are some tips to increase a low credit score and position yourself to qualify for a mortgage down the road:
1. Pay all your bills on time going forward with no exceptions – if a potential homeowner wants to qualify for a home loan, they have to demonstrate that they can pay their bills on time. An ongoing track record of late a payment is a sure fire way to secure a declination letter. Let’s face it, you know whether you have had late payments or not in the last 12-24 months, so don’t think that a lender won’t be able to discover this when they pull your credit report. While you can’t really do anything about bona fide late payments that you have had in the past, if you stay committed to the discipline of paying your creditors on time going forward, it will eventually pay off.
2. Obtain a Secured Credit and a Secured Installment Loan – There are countless banks and finance companies that offer secured credit cards and secured personal loans. With these products, the borrower deposits an amount equal to their loan or credit line with the creditor which acts as collateral. The funds stay in the account as long as the bills are paid on time. If the borrower defaults, the creditor simply liquidates the deposit to pay off the loan. This way, the creditor is taking on no risk. All payments on these loans are reported to the credit bureaus so they will help develop a track record of timely payments and improve one’s credit score. The diversity of both a revolving credit account and installment loan will also help. I recommend Capital One www.capitalone.com for a low cost secured credit card, and Houston Federal Credit Union, www.houstonfcu.org for a secured installment loan. To avoid getting yourself in trouble, only use the secured credit card for gas each month and pay off the balance entirely at the end of each month.
3. Pay off collections starting from the most recent and going back – Often, when a consumer has failed to pay a bill; whether it be an old utility bill, rent payment, or medical bill, these obligations come back to life as a collection on their credit report. This happens when the creditor sells the bad debt at pennies on the dollar to a collection company who then starts the process of attempting to collect the debt all over again. The good news is that old debts don’t hurt your credit score as much as newer ones do. In fact, derogatory credit is required by law to be removed from your report after seven years. Therefore, a consumer should focus not on paying the smallest or largest debts off first, but rather on the ones that are most recent and then working your way back. While this may take some time, good things come to those who wait!
Most consumers think that the time to start working on their credit is when they want to buy a home; when they relocate to a new city, when their current lease runs out, or when they get married or have children. The truth is that the time to work on building or re-building your credit is now. Hopefully these tips will help.