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3 smart solutions for a low credit score

Having a higher credit score can open the door to more financial opportunities.
10/5/2017 1:29:07 PM

When it's time to buy a home, one of the first things you'll likely look into is your credit score. This three-digit number gives lenders a hint as to how likely you are to pay your bills completely and on time.

A higher score means you're viewed as financially responsible to your lender. You could be rewarded with access to certain types of loans, such as jumbo mortgages, or with lower interest rates, resulting in a less expensive home loan in the long term.

A lower score means you could be a riskier borrower - perhaps you've been late on payments in the past, or maybe you already have a good amount of debt you still have to pay off. As such, a lender may either disqualify you from certain loan products or charge you a higher interest rate.

It's important to note that consumers who have lower scores (or even no scores at all) still have options when it comes to securing a mortgage. For example, people with scores as low as 500 can qualify for an FHA loan, according to FHA Handbook.

That said, having a higher score can open the door to more opportunities - both in terms of conventional mortgage products as well as other financial goals, like getting a new credit card or auto loan. If you've recently checked your credit score and aren't impressed with the results, there are some actions you can take to improve your standing. Follow these tips to begin improving your credit score:

Fix mistakes in your credit report

Like any other company, the credit bureaus are prone to human error. With hundreds of millions of adults in the U.S., it's not unheard of for information to be added to the wrong report - if you've ever done a Google search on yourself, you probably know there's someone else out there who shares your name, or at least something close to it.

The first step in any credit repair strategy should be to pull your credit report and look for errors. Identity errors, like listing another Jane Smith's account on your report, are among the most common. Others include accounts listed as open when they've been closed and accounts with the wrong credit limit after it's been increased.

Report mistakes like these right away. Then double-check that the mistake was fixed. According to the Consumer Financial Protection Bureau, reported mistakes that are reinserted in your report represent another commonly reported problem.

Never miss a payment

Payment history, including whether payments are made on time and in the correct amount, is the most important factor in your credit score. If you're prone to late payments and you have a lower score, this is probably why.

Create a plan to help you get on track with timely bill payments. A few tried-and-true tactics include:

  • Set up auto-pay through your bank - just make sure you'll always have enough cash in your account to make the payment.
  • Create calendar events in your phone to remind you to pay your bill before it's due.
  • Sign up for text message alerts to remind you to pay your bill before it's due.

If you have a long history of missed or late payments, it may take some time to repair the damage. However, remedying this bad habit as soon as possible will put you on the right path to bringing up your score.

Decrease your credit utilization rate

If you have a credit card, you have a maximum spending limit. This is the amount you can put on your card before it's declined. But that doesn't mean you should put that much on your card or anywhere close to it. In fact, you should aim for a credit utilization rate of 30 percent. This means that you should only ever have a balance of 30 percent of your maximum credit limit.

If you have more than a 30 percent credit utilization rate, focus on paying it down to at least that much. If you have a wallet full of maxed-out cards, paying off all the balances could improve your score by as much as 100 points in one month, NerdWallet reported. While this is clearly the best-case scenario, it just goes to show how important credit utilization is to your overall score.

Are credit score concerns holding you back from pursuing your dreams of homeownership? Don't let that number get in your way. Reach out to your mortgage lender to talk about your options - you might have more than you realize!

Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2016 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.