How to Fix Your Credit to Buy a Home
Buying a home is a monumental life event. Unfortunately, it’s one that can be thwarted by a few financial mishaps. If you have a poor credit score, you’ll need to make vast improvements to be eligible for a mortgage.
While it will take some time to fix your credit score, it’s not an impossible task. Here are some helpful tips to get you on track so that you can buy a home.
Read Your Credit Reports
Before you can raise your score, you need to know what’s affecting it. Generally speaking, this could include anything from late and missed payments to hard inquiries. Reading your credit score will give you better insights into your improvement timeline and focal points.
While striving to become financially responsible is essential, your credit report can highlight items to be disputed. If you see something that shouldn’t be on there, you can go through the dispute process to have negative items removed, thus improving your score.
Look for Lower Interest Options
Take a high-level look at your debt situation. If you have numerous streams of debt, talk to a financial specialist and see if there’s room for consolidation. Moving your debt over to a lower-interest option will help you stay on top of minimum payments and make progress in paying it down.
Interest is a vicious cycle for many borrowers. As your credit score gets worse, your eligibility for low-interest options diminishes. It gets harder to pay the minimum, let alone getting ahead of your payments. Sometimes consolidation is the only option to get ahead.
Stick to a Budget
Your budget is the foundation of financial health, especially when preparing to take on a mortgage.
The first step to setting a budget is to look at all your spending to understand where your money goes. Consider using an app like Mint to analyze and categorize your expenses for you.
Once you have an average of how much you spend, highlight what’s necessary and what’s not. Set goals to reduce the unnecessary expenses a bit at a time. Don’t make the mistake of cutting your entire entertainment budget. Instead, scale back and set limits. Setting a budget is like dieting— if you are too restrictive, you’ll relapse.
Take a Snowball Approach to Debt
If consolidation isn’t an option, use the snowball method to pay down your debts. Financial guru Dave Ramsey developed this approach to help build healthy financial habits.
To use the debt snowball, list all of your debts from smallest to biggest. Commit to paying the minimum payment on each debt, plus $100 more on the smallest debt. Once the smallest debt is paid off, allocate that money to paying off the next biggest debt. Work your way up, paying your debts exponentially.
Use the 2-by-2 Rule
Another strategy for paying down consumer debt is using the 2-by-2 rule. This budgeting method will help you pay down your debt exponentially.
With this rule, you evaluate your expenses over the past few months and set an average in each category. Then you commit to spending 2% less of your total expenses in the coming month while earning 2% more in income. You can find that 2% anywhere. Perhaps you skip two restaurant meals to cut your expenses while selling a few unused items to generate income.
The crucial part of this approach is to apply that 4% to your debt— above and beyond the minimum payments.
Improve Your Usage Ratio
One of the calculations used for your credit score is your debt usage ratio. In other words, it’s how much you’ve been approved for versus how much you use.
Say you’re approved for a $10,000 line of credit. In one scenario, you borrow $8,000 and always make your minimum payments. In another scenario, you only use $3,000. Your credit score will be better in the second scenario because you’ve used far less than you’ve been approved for.
When you pay off your debts, don’t close your accounts. This will help you improve your credit score and be eligible for a mortgage quicker.