Buying a house can be a major first step into adulthood or the fulfillment of a long-planned dream. But having a low credit score could limit your options. With a low credit score, even if you get approved for a mortgage, you could be faced with high-interest rates. If you’re looking to improve your credit score, especially if it is 620 or lower, the tips below are for credit repair to buy a house.
Understand your credit score
Your credit score consists of six elements, which are weighted in various percentages to make a single number between 300 and 850.
The five components of your credit score, with percentage weight of the total score, are:
- 35% payment history
- 30% amount owed (debt)
- 15% length of credit history
- 10% number of new credit lines
- 10% credit mix (revolving, installment, and open credit)
In general, a credit score of 740 or above is considered very good. To help get favorable terms on a mortgage, aim for a credit score of higher than 700. There are actions you can take to improve (or harm) your score through each of the five score components, below.
9 ways to improve credit score to buy a house
Credit building is a long-term process. If you want to repair credit to buy a house, you may be able to see a significant jump in even a couple of months by implementing the steps below.
1. Check your credit report for errors
The first step is to understand what lenders are seeing. You have the right to request a free online credit report every year from all three main credit bureaus: Experian, Equifax, and TransUnion. Not all creditors report to all three credit bureaus, so it’s worth checking your credit report with all three.
Check for errors, including incorrect debt amounts, incorrect name or Social Security number as well as any other information you don’t recognize.
2. Pay your bills on time
One of the most important steps you can take for repairing credit to buy a house is to pay all bills on time. Even a single missed payment could stay on your credit report for several years. Because on-time payments make up 35% of your credit score, this is perhaps the simplest step to start to repair credit to buy a house.
To avoid accidentally missing a payment, you can set up automatic payments from your bank account for the minimum payment due each month.
3. Pay off your debt
The next step to repair credit to buy a house is to work toward paying down existing debt by making more than the minimum payment or taking on a debt repayment plan. You can also consider a low-interest personal loan to quickly pay off high-interest debt like credit cards.
Ideally, pay off all credit cards in full every month. If that is too much, aim to keep the debt below 30% of available credit to avoid a drop in your credit score. That means that if you have two credit cards each with a $5,000 credit line, you’ll want total debt to be less than $3,000, or 30% of $10,000.
4. Reduce your credit card balances
Credit cards typically have high-interest rates, often a 20% to 25% annual percentage rate (APR). That means that if you carry the debt for a long time, you’ll end up paying almost as much as the value of the original purchase in interest.
To build credit, stop thinking of credit cards as a loan and only spend what you know you can pay off at the end of the month. You may need to cut spending and start budgeting. Some people find it easier to stop using credit cards entirely until the balance is paid off.
5. Get a secured credit card
Secured credit cards are designed to help you build credit, and can be an important tool to repair credit to buy a house. Unlike a traditional credit card, with a secure credit card you deposit funds first. Those funds are used against the card’s limit. Payment history will be reported to the credit bureaus to help build credit with on time payments. It is a way to establish a credit history or build responsible spending habits without going into debt.
With a secured credit card, the credit limit is tied to the deposit amount. The higher the deposit, the higher the credit limit. You can get secured credit cards with a deposit of as little as $200. Some banks and credit unions will also help you open a secured credit card against a savings account.
6. Become an authorized user on a credit card
Need credit repair to buy a house quickly? Becoming an authorized user on a credit card is a great option for rebuilding credit. When you become an authorized user on a friend’s or family member’s account, you gain the benefit of their good credit score.
Ask friends with 20-plus years of credit history and a good credit score. You’ll benefit from the length of time they’ve had credit, improving your length of credit history. You can also benefit from their on-time payment history, low total debt, and credit mix.
7. Consider a credit-builder loan
A credit-builder loan is designed to boost your credit score even if you’re starting with a low credit score and can’t be approved for a traditional loan. When you use a credit-builder loan for credit repair to buy a house, you make regular monthly payments and the bank retains the loan amount until you’ve paid the loan in full. It then deposits the loan amount in your account.
For example, if you take out a $500 credit-building loan with a 10-month term, you’ll pay $50 per month (plus any interest) over 10 months. At the end of 10 months, the bank will transfer $500 to your bank account. This is a way to build credit history and savings while demonstrating financial responsibility. Just make sure you make every payment on time to build a good credit history.
8. Obtain a credit limit increase
As your score improves, increasing your credit limit — but not using it — can further boost your credit score by reducing the debt ratio. Here’s an example:
Suppose you have one credit card with a $3,000 credit limit and $1,500 in debt. You’ve been working hard to build credit, and your score has improved. You request a credit limit increase directly with your bank or financial institution and are approved for an increase to $5,000.
Now you can charge more on your credit card without surpassing 30% of the credit limit. With $1,500 in debt, you would be using 50% of your credit limit with the old credit line. With the new credit line, your debt ratio would drop to 30% — now within the ideal range.
9. Hold off on applying for new credit accounts
Lenders see multiple credit applications in a short time as a red flag. Don’t apply for new forms of credit right before applying for your mortgage. Once you’re ready to apply for a mortgage, it’s worth holding off from new credit line applications for at least three to four months.
If you’re repairing credit to buy a house, a new credit line can increase your total credit limit. But multiple applications can hurt your credit score. Don’t apply for more than one credit card every three to four months.
How long does it take to fix credit to buy a house?
Repairing credit to buy a house can take anywhere from three months to a year or more. In addition to the above steps, you can consider a rent-reporting company to get credit for on-time rent and utility payments.
When working on repairing credit to buy a house you could start to see results within one to two months and bigger results within six months. But that will depend on total debt, on-time payments, and other factors.
Mastering Credit Repair To Buy A House
By working to reduce total debt and ensure on-time payments, you’re well on your way to repairing credit to buy a house. If you’re able to become an authorized user, boost your score with a rent-reporting company, and request a credit line increase, you could see even faster results. You can use the steps above for immediate credit repair to buy a house and for long-term financial opportunities that a good credit score could open.
Are there financial advisers who can help me fix my credit?
What are the benefits of having a good credit score?
There are many benefits of a good credit score, including the better interest rates on mortgages, loans, auto insurance, and homeowners insurance. It can also be easier to rent apartments, secure a loan, or gain access to perks and rewards from banks or credit card issuers.
What steps should I take to fix my credit score to buy a house?
It is possible for consumers tofix their credit score in as little as three to six months. How quickly you can repair credit to buy a house will depend on your current credit score, how quickly you can pay off total debt, and whether you can become an authorized user.