Improving your credit

Before purchasing a home, it is a good idea to understand the role that credit plays in the loan process. Lenders accept or deny your request for a loan based, in part, on information found in your credit reports. Your credit score reflects your credit payment patterns over time.  Focusing on the following actions could help to improve your credit score.

1. Pay Your Bills on Time. Because your payment history is usually considered a good indicator of future performance, lenders are interested in how reliably you pay your bills. Keep in mind that paying late can negatively affect your score. By paying your bills on time you can positively influence this credit scoring factor.
2. Pay off Debt and keep Credit Balances low. Your credit utilization ratio is another key component in your credit score calculation. It is determined by dividing the total of all your credit card balances (at any given time) by your total credit limit. You can positively influence your credit utilization ratio by paying off debt and keeping credit card balances low.  As an indication that you manage your credit well, a credit utilization of 30% or less is most desirable.
3. Do not apply for New Credit unless you need it. Unnecessary credit applications /accounts can harm your credit score in multiple ways, from creating too many hard inquiries to tempting you to overspend and thereby increasing your credit utilization ratio.
4. Don’t close unused Credit Cards. Keeping unused credit cards open is a smart strategy – providing they are not costing you money in annual fees. Closing an account may increase your credit utilization ratio and lower your credit score.  For example, if you have three open accounts with a total balance of $900 on two of them and a $0 balance on one of them and your credit limit on each of them is $1,000 ($3,000 total).  Your credit utilization is 30%. However, if you close the one account that has a $0 balance, your credit utilization will be 45% because your total credit limit is now $2,000 instead of $3,000.
5. Dispute Any Inaccuracies in Your Credit Reports. Before starting the loan process, check your credit report with TransUnion, Equifax, and Experian. Look for any information that might be inaccurate, incomplete or outdated.  Also check for any accounts that you do not recognize and confirm that your personal information is reporting correctly.  If you see any errors, you will want to get them corrected immediately.

Having said this,  keep in mind that improving your credit score may take time; but the sooner you address any issue(s) the faster your credit score will improve.