How To Increase Credit Scores

This guide will cover how to increase credit scores to qualify for a mortgage. Having higher credit scores mean lower rates.  Your credit score is essential to your financial life. It affects your ability to obtain credit, the interest rates you’ll pay, and even your employment opportunities. Mortgage brokers and lenders all use the same credit reporting system to determine the qualifying credit score of borrowers. Alex Carlucci of Gustan Cho Associates explains about the FICO credit scoring model as follows:

The FICO score is the most widely used credit score model, which ranges from 300 to 850. A high FICO score indicates good creditworthiness, while a low score indicates a high risk to lenders. If you have a low FICO score, you can take steps to increase it.

In this guide, we’ll outline strategies for how to increase credit scores to meet the minimum mortgage guidelines. We will also cover improving your FICO score. including how to check your credit report, address negative items, develop good credit habits, utilize credit-building tools, and monitor your credit regularly. Patience and persistence can improve your credit score and help you achieve your financial goals.

How To Increase Your Credit Scores Quickly To Get Qualified For a Mortgage

FICO stands for Fair Isaac Corporation, the company that developed the scoring model. FICO scores are a type of credit score that lenders use to evaluate a borrower’s credit risk. FICO scores range from 300 to 850, with a higher score indicating a lower credit risk.

All mortgage companies will use the middle of each consumer’s three credit scores. There are three credit bureaus: Experian, Transunion, and Equifax. Most consumers have three credit scores. One from each credit bureau. Lenders will take the middle credit score as the qualifying credit score for mortgage qualification.

Your FICO score is calculated based on information from your credit report, which includes data about your credit history, such as payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries. This information calculates your FICO score using the Fair Isaac Corporation-developed proprietary algorithm.

The Importance of Good Credit Before Applying For a Mortgage

Your FICO score is crucial because it is the primary factor lenders use to evaluate your creditworthiness. A higher FICO score can make it easier to get approved for credit, such as loans or credit cards, and may result in better interest rates and terms.  Mike Gracz of Gustan Cho Associates explains having low credit scores when applying for a mortgage loan:

A lower FICO score can make it more challenging to obtain credit. You may be subject to higher interest rates or less favorable terms. Having bad credit is like having a hangover. The lower your credit, the worse your hangover. Over time, your credit scores will increase even though you do nothing. There are ways how to increase credit scores quickly to qualify for a mortgage.

In addition to being important for obtaining credit, your FICO score can also impact other areas of your life. Employers, landlords, and insurance companies may use your credit score to evaluate your trustworthiness or risk, so keeping your FICO score as high as possible is essential.

Credit Score Basics For Homebuyers

Checking your current FICO score and credit report is the first step in improving your creditworthiness. This section will cover some steps to help you obtain your credit report and FICO score. First, you need to obtain your credit report and credit score. You can obtain a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once every 12 months by visiting AnnualCreditReport.com. Reviewing your credit report regularly is essential to ensure accurate and up-to-date information.

How To Obtain Your Credit Score

You can obtain your FICO score from any of the three major credit bureaus or purchase it directly from myFICO.com. Some credit card companies and banks also provide FICO scores for free to their customers. It’s important to note that each credit bureau may have a different FICO score, so it’s a good idea to obtain your score from all three bureaus. Joe Betro of The Loan Store and associate contributing editor at Gustan Cho Associates explains how credit bureaus often make errors on their entries. Here is what Joe Betro says:

Consumers should thoroughly review their credit reports for errors and inconsistencies: Once you have them, it’s important to review it thoroughly for errors and inconsistencies. Common errors include incorrect personal information, accounts that don’t belong to you, and inaccurate account balances or payment history. If you find any errors, you should dispute them with the credit bureau that issued the report.

You can dispute errors by contacting the credit bureau directly and providing documentation to support your dispute. The credit bureau will investigate the dispute and update your credit report accordingly. Reviewing your credit report for errors and inconsistencies is crucial because inaccurate information can lower your FICO score and make it harder to obtain credit.

Fix Your Credit Report Errors

Addressing negative credit report items is crucial for improving your FICO score. In this section, we will cover strategies for addressing negative items. Strategies for paying off outstanding debts by negotiating with the creditor.

Outstanding debts, such as fresh collections or charged-off accounts, can significantly lower your FICO score. The older a collection or charge-off account is, the less impact it has on your credit scores.

One way to address outstanding debts is to pay them as a pay-for-delete. You do not have to pay outstanding collections or charge-off accounts to qualify for a mortgage. If you have a collection or charge-off recently reported on your credit report, you can try to do a pay-for-delete with the creditor.

Credit Disputes During The Mortgage Process

Credit disputes are when consumers dispute derogatory credit tradelines. Many consumers will dispute in hopes of getting the negative item removed. When consumers dispute credit tradelines, the credit bureaus automatically negate the negative disputed credit tradelines from the credit scoring model. Alex Carlucci of Gustan Cho Associates explains how credit disputes work.

Whenever there is a credit dispute, the algorithm of the credit scoring model has been programed to discount the negative credit scoring points from the consumer credit report. Therefore, every dispute will increase consumer credit scores. This is why non-medical credit disputes and derogatory credit tradelines are not allowed during the mortgage process.

Medical credit disputes are exempt from retraction. Zero balance non-medical credit disputes are exempt. Any non-medical credit disputes on non-medical collections that total less than $1,000 are exempt from retraction.

Pay-For-Delete on Collection Accounts

Consumers can negotiate collection accounts with pay-for-delete for less than the face value. Consumers can do a pay-for-delete in full or negotiate a payment plan with their creditors if the collection balance is large. You can also consider working with a credit counseling agency to help you develop a debt repayment plan. Denise Willow of Superior Lending in Las Vegas, Nevada, explains disputing inaccurate information. 

Disputing inaccurate information on your credit report and backfire on you if you are planning on applying for a mortgage. There are instances where creditors will not remove credit disputes. Once your lender instructs you to remove the credit disputes, your credit scores will drop because the credit bureau algorithms will factor the negative tradelines back into the credit scoring factor.

Inaccurate information on your credit report can lower your FICO score. It’s important to dispute any inaccurate information with the credit bureau that issued the report. You can dispute errors by providing documentation to support your dispute, and the credit bureau will investigate the dispute and update your credit report accordingly. Working with creditors to negotiate payment plans: If you’re struggling to pay off outstanding debts, you can work with your creditors to negotiate payment plans. Many creditors will work with you to develop a plan that fits your budget. You can also consider debt consolidation, which involves combining multiple debts into one loan with a lower interest rate.

Develop Good Habits Paying Bills Religiously

Good credit habits are essential for improving your FICO score and maintaining good creditworthiness. Some habits to develop include paying bills on time. Paying your bills on time is one of the most important habits to develop for good credit. Late payments can significantly lower your FICO score and remain on your credit report for up to seven years. Remember to pay all minimum credit card payments on time. Never be late on your monthly payments, advises John Strange of Gustan Cho Associates. John also advise the following when it comes to timely monthly payments:

Set up automatic payments or reminders to help you pay your bills on time. Keeping credit utilization low. Credit utilization refers to the amount of credit you use compared to your credit limit. Keeping your credit utilization below 30% of your credit limit is important. High credit utilization can lower your FICO score and make it harder to obtain credit. Consider making multiple payments throughout the month to keep your credit utilization low. Apply for credit wisely. Too often can lower your FICO score.

Only apply for credit when you need it, and make sure you’re applying for credit that you will likely be approved for. Applying for credit which you’re not likely to be approved for, can result in multiple inquiries on your credit report, which can lower your FICO score. Avoid new credit inquiries: New credit inquiries can lower your FICO score, so it’s important to avoid unnecessary inquiries. For example, if you’re shopping for a car or a home, apply for credit within a short period. Multiple inquiries for the same type of credit within a short period are typically treated as a single inquiry on your credit report.

Using Secured Credit Cards To Rebuild and Increase Credit To Buy a Home Quickly

Utilizing credit-building tools can be an effective way to improve your FICO score and establish good credit. In this section, we will cover the easiest way how to increase credit scores so you can qualify for a mortgage fast. Joe Betro of The Loan Store explains how a secured credit card works as follows:

Secured credit cards is the quickest tool to increase and rebuild your credit.  Secured credit cards are credit cards that require a security deposit, which is typically equal to your credit limit. 

Secured credit cards are designed for people who are new to credit or have poor credit. Using a secured credit card responsibly and making on-time payments can establish a positive credit history and improve your FICO score.

Using Credit Rebuilder Loans To Increase and Rebuild Credit To Buy a House

Credit builder loans are another tool that can increase your credit scores. Credit rebuilder accounts are a strong tool for you to rebuild your credit. Credit builder loans are designed to help you build credit. Angie Torres of Gustan Cho Associates explains how credit rebuilder accounts work:

Credit rebuilder accounts such as Self.Inc is simple, fast, and does not cost much money. For only $25 dollar per month, you make a pledge of the minimum amount you want to deposit every months for a savings account. It is a one year bank Certificate of Deposit where after the 12 month term is up, you get the money you invested back. The minimum monthly payment you pledge will be reported as an installment loans to the credit bureaus. This is another way of rebuilding your credit.

Credit rebuilder loans work by depositing the loan amount into a savings account, which you can’t access until you’ve paid off the loan. As you make on-time payments, your lender reports your payments to the credit bureaus, which can help you establish a positive credit history and improve your FICO score.

Being Added As an Authorized Credit Card User

Authorized user accounts: If you have a friend or family member who has good credit, you may be able to become an authorized user on their credit card account. As an authorized user, you’ll be able to use the credit card, and your credit history will benefit from the positive payment history of the primary cardholder. Alex Carlucci of Gustan Cho Associates explains how authorized credit cards work in rebuilding credit:

Not all credit card issuers report authorized user accounts to the credit bureaus, so it’s important to confirm that your activity will be reported. Some credit card companies may just report to one or two credit bureaus and not all three.

Before pulling the trigger for being added as an authorized user, make sure the credit card has a perfect timely payment history and a low credit card balance. Have the main card user see if the credit card company reports to all three credit reporting agencies.

Monitor Your Credit Report Regularly

Monitoring your credit regularly is essential for maintaining good credit and detecting any errors or fraudulent activity on your credit report. In this section, we will cover some ways to monitor your credit. Setting up credit monitoring alerts. Alex Carlucci of Gustan Cho Associates explains credit monitoring for consumers:

Many credit monitoring services offer alerts that notify you of any changes to your credit report, such as new accounts or inquiries. You can set up alerts to notify you of any changes to your credit report so that you can detect any unauthorized activity or errors on your credit report. Reviewing credit reports regularly:

It’s important to review your credit reports regularly to ensure that they’re accurate and up-to-date. You’re entitled to one free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) every 12 months. Review your credit reports carefully for errors, such as incorrect personal information, accounts that don’t belong to you, or accounts with incorrect balances. If you detect any errors on your credit report, you can dispute them with the credit bureau that reported the error. The credit bureau will investigate the error and correct it if necessary.

How Long Does It Take To Increase Credit Scores To Buy a House

Improving your credit and increasing your FICO score takes time and effort. It’s important to recognize that building good credit habits and improving your credit score is a process that requires patience and persistence. Some things to keep in mind include recognizing that improving credit takes time. Rebuilding and boosting your credit scores does not happen overnight, says Dale Elenteny of Gustan Cho Associates. Here is how Dale Elenteny explains the road to good credit:

Improving your credit score won’t happen overnight. It takes time to establish a positive credit history and for credit bureaus to update your credit report. It’s important to be patient and continue to make on-time payments, reduce your credit utilization, and follow good credit habits over time.

Continuing to follow good credit habits: To maintain a good credit score, it’s important to continue to follow good credit habits, such as paying bills on time, keeping your credit utilization low, and avoiding new credit inquiries. These habits will help you establish a positive credit history and improve your FICO score. It’s also important to remember that mistakes and setbacks can happen. If you miss a payment or make a mistake, learning from it and following good credit habits moving forward is important.

The Importance of Having Good Credit

In conclusion, having a good credit score is important for many aspects of your financial life. Having good credit is important for getting approved for loans, credit cards, and even renting an apartment. Michael Gracz, a licensed loan officer at Gustan Cho Associates explains the importance of good credit as follows:

Improving your FICO score requires understanding what it is, checking your current score and credit report, addressing any negative items, developing good credit habits, utilizing credit-building tools, and monitoring your credit regularly.

The road to good credit does take time. It is not accomplished overnight. It is important to be patient and persistent in following good credit habits over time. By taking these steps, you can improve your creditworthiness and achieve your financial goals. Building good credit takes time, but the effort is worth it.