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We’ve all been there at some point in our lives, haven’t we? We see a great house in a wonderful neighborhood and we’re in the market to purchase a forever home. The Open House was wonderful, everything looks great! You’re ready to take that next step and contact the mortgage broker experts to set up financing. Then you get the offer from the lender and the rates are astronomical! What happened?!? If this has happened to you in the past, don’t feel bad as this has happened to plenty of people over the years. The biggest barrier to getting a reasonable rate is down to your credit score. We’ll look at ways to get this score where it needs to be to get that rate down to more manageable levels.
Credit Score
First piece of business is to be aware of what a credit score actually is. Most lenders look at the Equifax score to determine your creditworthiness. This Equifax score is the Australian equivalent of the American FICO scoring system. The system is scored on a scale from 300 being rock bottom to 850 being top tier credit. Scores of 850 are pretty rare as there are so many variables and situations that will ding your credit score by a few points here and there. Most lenders like to see a score above 700 to get better interest rates on home mortgages. If your score is below 700, there are ways to get that number up.
Pay Your Bills On Time
This seems like a no-brainer but it’s vitally important to stay current on your payments. One missed payment can affect your credit score minimally, two or more missed payments can really do a number on your score. So always make sure that you keep paying your bills on-time every month.
If you do happen to be late with a payment every so often, it’s not the end of the world. Most credit card companies have a 30-day grace period when it comes to late payments and they usually don’t report any late payments that fall within that period.
Companies are also willing to work with you on missed payments as long as they’re isolated incidents. Companies can remove missed payments on your credit report when you’ve shown that they were indeed an isolated incident by making future payments on time.
Keep Your Credit Inquiries To A Minimum
Every time that you apply for a loan or a credit card, it’s registered as a credit inquiry. The creditors are “inquiring” about your past credit, hence, it’s called a credit inquiry. When a credit report has a lot of credit inquiries, it’s reflected negatively on your report. This is due to how it looks to a potential creditor, it looks like you were desperate to acquire credit and racked up a bunch of rejections in the process. Any time that your credit report is accessed for a credit card application or a loan, it shows up as an inquiry.
Debt To Income Ratio
The Debt-To-Income Ratio is a formula that lenders use to determine how much debt you carry compared to your income. If that number is too high, then you’ll most likely be either rejected for a loan or you’ll receive unfavorable terms for the loan. Having a lot of debt to pay off will impede your ability to pay this new loan on time. This is why lenders view these types of clients as high-risk.
Credit Usage
In relation to the Debt-To-Income Ratio above, credit usage can also play a factor into your credit score. Using too much of your available credit will have a negative impact on your credit score. A good rule of thumb to use is to try and keep a credit usage ratio of around 10% or less. For Example: You have a credit card with a $5,000 credit limit. You should try and keep the balance no higher than $500. You can go as high as 20 or even 30% without affecting your score too much, but don’t go any higher than 30%.
Have Negative Items Removed From Your Credit Report
Look at your credit report and determine where your negative items come from. Contact those creditors to see if the debt is legit and if it’s not, have them remove it from your report. If the creditor refuses to remove it, you can file a dispute with Equifax to have it removed. If the debt is legit, you have a couple of choices to make. You can either set it up with the creditor to have them remove the debt from your report in lieu of your full payment of the balance, or you can settle the debt for less than what you owed.