Your credit score will play a pivotal role in your personal finances, especially when you decide to purchase a home. Understanding this score and how to improve it to the point where you can get a significant mortgage on the house you intend to buy is essential.
What is a Credit Score?
A credit score is a grading system which ranges from 300 to 850. It is a measure of your credit worthiness, and in a debt based society, will determine whether lenders will provide you loans, and at which types of interest rates. Things which influence your credit score include your credit-to-debt ratio, payment history, how long you’ve had credit, how much of credit you are applying for, and the types of credit you carry. When we talk about credit, this includes car loans, student loans, credit cards, personal lines of credit and more.
To get a FHA loan for a house, your credit score will need to be a minimum of 580. However, many real estate experts suggest increasing your score to at least 640 before attempting to obtain a mortgage. One reason for this is due to the cautious lenders that you might be approaching. Also, having a higher credit score will help you attract mortgages from different lenders, all vying for your attention. Remember, your goal when getting a mortgage is to obtain the best interest rates possible, so the higher your credit score, the better it will be.
How to Raise Your Credit Score
In simple terms, raising your credit score is straightforward – all you need to do is acquire credit and use it properly. People who have terrible credit are often undisciplined spendthrifts that don’t know how to manage their money properly or make their payments on time; before long they wind up deep in debt and behind on payments, which will cause their credit score to plummet. If your credit score falls into the 300 to 400 range, many mainstream lenders will refuse to provide you credit, forcing you to rely on high interest payday loans or other forms of undesirable loan types.
However, do note that your credit score can be repaired. Those with bad credit can opt for a secured credit card, which will provide you with the same abilities as an unsecured credit card except you’ll have to make a deposit up front before you can begin using it. Deposits typically range from a few hundred to a few thousand dollars, and this will be your limit. They are similar to debit cards, except they influence your score.
Also, your credit card utilization rate should be no more than 30 percent, and is defined as the amount you owe on the card compared to the limit. Your goal is to use the credit card regularly while keeping the amount you owe on it no more than 30 percent of the limit. For instance, if the limit on your credit card is $10,000 then you should owe no more than $3,000, as this is 30% of $10,000. Continue doing this and within six months to five years and your credit score will increase, allowing you to qualify for a bigger mortgage with an attractive interest rate.
If you are interested to know more about how to get a bigger mortgage, you can also discuss this with the realtor you are using. In most cases, your realtor will have pertinent advice that suits you specific situations.