As a real estate agent, I get a tremendous number of questions regarding financing a home. Today we are seeing a full force credit crunch with respect to home loans. I wanted to briefly write about how prospective homebuyers can build credit before they buy. If you plan on buying a home in the near future, there is no better time than now to work on building credit.
There are two very important things to consider when building credit. First, it is important to have a high credit limit and a low balance. The higher your limit and the lower your balance, the better your score. Second, you must make your payments on time every month, like clockwork. These two factors will build a credit score in record time.
For example, I recently worked with a lady and recommended that she have a talk with a certain lender. Her credit score was in the low 500’s and she needed to raise the score before she could afford the kind of home that she wanted. Her current credit report indicated that she had not paid a few bills. In reality she had actually paid these bills, but the creditor had not updated the report to indicate her obligations had been fully paid.
Her loan officer corrected the errors in her report showing that the two outstanding obligations were, in fact, paid in full. Making this correction had the effect of changing her ratio of – credit limit to amount owed – (in essence, her true balance). Once the correct amount owed was reflected in her credit report her credit score increased more than 100 points in about a week. That’s how quickly a change in credit score can happen!
Another strategy to improve your credit is to open a line of credit and borrow only a small amount of money. Then, pay off the balance at the end of the month. One method to do this is with a prepaid credit card. Use it for groceries, gas, and other things that you are going to buy anyway on a regular basis. After doing this for about a year, your credit report will reflect that you have paid as agreed. The longer you keep up this responsible behavior, the better your credit score will become. The prepayment you make on the credit card is really just a deposit. So, in the end you’ll get that money back and have a true line of credit to show for the investment.
People who’ve had troubled credit histories, such as bankruptcies or foreclosures often become scared of credit. For that reason, they don’t actively pursue credit or make a concerted effort to rebuild their credit profile. If you are one of those people, it’s important to talk with your home loan officer before you think about buying a house. He or she can help you build credit and put you on the path to getting the house you really want.