If you’re thinking of buying a house (or a car, or a business, or anything else that requires a loan), be aware that lenders will use your credit score to determine whether to make the loan, how much to lend, and cost of the loan.
Because credit scores consider so many variables, they can predict with great accuracy who is likely to repay loans and who is likely to default. Credit scores are based on how many open accounts you have, your level of debt, and your repayment history. Credit scores range from 300 to 850, with higher scores indicating more creditworthiness–a good score is considered 670 and higher.
Your financial behavior affects your score. You can improve your score, but it’s not a quick process, so if you’re planning to buy a house and you need a loan, now is the time to figure out where you stand and start shoring things up if need be.
You can check your credit rating at www.creditkarma.com. Some people think you’ll damage your credit score by checking it regularly; you won’t. If banks or other financial institutions check your score frequently, that’ll send up a red flag, but as an individual, you can check your own score without negative consequences.
PAY BILLS ON TIME EVERY TIME
The first and most important way to improve your credit score is to pay all your bills on time every time. If you struggle to pay bills on time, enroll in autopay. Most credit card companies, utilities, and other service providers with recurring invoices are happy to set up automatic payments, so as long as you have money in the bank to cover the automatic withdrawals, your credit score will benefit from this arrangement.
If you know your payment will be late for some reason like a family emergency, reach out to your creditor before your payment is due and explain the situation. As someone who manages loans, I can tell you, I have waived many late fees and opted not to report late payments for those who communicate with me.
If, on the other hand, I have to hunt you down to get paid, I’m far less likely to be sympathetic. It always amazes me when people who haven’t returned my calls or responded to my emails, barge into my office after they receive my pay-or-quit notice demanding to be given a break. I’m not interested in your sob story if you’re rude, especially if you’re rude to the receptionist who does not deserve your bad attitude. At that point, I don’t care how good the excuse is for your late payment.
DON’T MAX OUT CREDIT CARDS
Another way to improve your credit score is to keep your credit utilization around 30 percent or less. This means if you have a credit limit of $12,000, you don’t want your balance to go above about $3,600. Lenders want you to have a cushion so if something goes sideways, you can borrow against existing credit (rather than miss your payment to them).
Finally, it is important to check your credit report periodically and to correct any mistakes you find. I once discovered that although I was paying on time, a lender marked my payments as late. Come to find out that his company was penalizing debtors for his company’s inability to process payments in a timely manner. They immediately corrected their mistake and reported their error, improving my credit score in the process.
Oftentimes, the better your credit score, the lower your fees and interest rates. A good credit score won’t allow you to borrow beyond what you can repay, but it will allow you to stretch your hard-earned dollars into a loan that could land you in the home of your dreams.
If you have questions about property management or real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 45 years.