There are a couple of things that I think everyone needs to know about credit.
- Credit Karma is not accurate. They use a consumer pull, which goes back 3 years, while lenders do a 7-year lookback. Same goes for those handy credit scores your credit cards will give you. They use less data, which can be frustrating when the site says 650 and the report I pull says 580.
- Paying someone to fix your credit is a terrible idea. With very few exceptions, you are paying them to do what you can and should do for yourself. Talk to a credit counselor at a local nonprofit or at your credit union. DON’T pay someone large monthly payments and have them “pay” your creditors. They are getting your creditors to agree to accept lower payments, which will hurt your credit for the next 3-5 years.
- Having your credit pulled by a lender will not destroy your credit. Lender pulls are very low-impact, only a few points max. Buying a car or opening 5 new credit cards… now THAT will hurt. If you have good credit, put it to good use. Let’s get you a better mortgage.
When looking at a mortgage, your lender will look at three scores from Equifax, Experian and TransUnion. Those scores are determined by the following:
- Payment history (35%)
- Amount owed (30%)
- Length of credit history (15%)
- Types of credit (10%)
- New credit (10%)
It’s no secret that credit is very important when you’re looking for a mortgage. Most kinds of loans require at least a 580, cash out requires a 620 and top-tier is usually at 740… but if you’re nowhere near those, all is not lost.
Here are some great tips you can use to improve your credit:
Tip 1: Know where you stand.
One of my favorite tools that Quicken has put together is called QLCredit. QL Credit will tell you a rough approximation of what your credit score is (remember: consumer pull). That tool will also help you understand ways you can improve your credit.
You can also check your credit report on a regular basis for errors and discrepancies. By law, you’re allowed one free copy of your credit report per year from each bureau by going to AnnualCreditReport.com.
Tip 2: Consider a Secured Credit Card
If you don’t have established credit, this is the best way to do it. Head down to your local credit union and open up one of these. You’ll pay money to it at first, usually $500. From there, you’ll pay your groceries on it once or twice, keep a small balance, and then pay it off. You’d be amazed at how well this works.
Tip 3: Pay down balances to 30% of limits
Easier said than done, but this makes a big difference. but don’t go out starting new credit cards to have a bigger limit-balance ratio… that’ll only hurt you!
Tip 4: Pay everything on time. Always.
This is the #1 thing you can do to keep your credit going in the right direction. Even the minimum payment balance will keep you from seven years of a lower credit score. In addition, pay off any debt rather than shuffling it from one credit card to another. You can’t avoid it forever. Make the payments and keep your credit score out of trouble.