When applying for a mortgage, your credit score is one of the significant factors that lenders look at before approving the application. With a low credit score, lenders consider you a higher risk, and you may struggle to get approved for a loan. If you do get approved, you may end up with a higher interest rate, resulting in more cost over the life of your mortgage. Instead of dealing with higher interest rates or getting turned down for a mortgage, you should take steps to increase your credit score. Before applying for a mortgage, follow these steps to assess your creditworthiness and begin establishing better credit.
Start by Checking Your Credit Report
The first step in improving your credit score is to determine where you stand. Each year, you can obtain a free credit report from most credit agencies. This report should include previous credit applications and queries, missed credit payments, and the name of your employer.
If you detect any inaccuracies, you can report them to the credit reporting agency. These inaccuracies may include missed payments that were resolved or debts that you have accumulated due to identity theft.
Along with inaccuracies, you should look at your current credit score. This score is based on your credit history and is given on a scale of 0 to 1000. Those with a very good or excellent credit score are more likely to receive the advertised interest rates when applying for a home loan. A score between 625 and 699 is considered good, while a score of 700 to 799 is considered very good. A score of 550 to 624 is fair. If your score is below 550, you have bad credit.
Ensure That You Pay Your Bills on Time
Your payment history directly impacts your credit score. If you miss payments on loans, credit cards, and utilities, your credit score will suffer. Before applying for a home loan, review your payment history and start paying all your bills on time. Late payments are not always due to a lack of income or financial planning. You may forget a payment. To avoid these issues, you should consider setting up automatic payments.
Consider Consolidating Your Debt
If the substantial debt is one of the reasons for your low credit standing, you may want to explore debt consolidation. Consolidation allows you to combine your existing debts into a single loan. People often choose this method to help avoid late payments and the accumulation of unnecessary interest and penalties. Depending on the rates, term, and amount of your existing debt, consolidation may allow you to pay down your current debt more quickly.
Avoid Closing Accounts or Applying for Credit
Other than debt consolidation, you should avoid closing accounts or opening new accounts. Your unused credit helps lower your total credit utilisation ratio. By closing an account with zero balance, you may hurt your credit score. An abundance of credit queries can also negatively impact your credit score. Choosing to open new accounts shows a lack of financial planning, instead of saving for the things that you need.
Maintain a Job with Your Current Employer
Attempting to improve your credit is not the best time to switch jobs. Job stability is a consideration for both your credit score and loan application. Sticking with the same employer shows that you have a consistent income and are less likely to default on your home loan.
Search for Bad Credit Home Loans
While these suggestions may help you improve your credit score, you may not have the luxury of waiting for your credit to improve. It may take months or years for some of the changes that you make to affect your credit standing. Luckily, there are solutions for those with bad credit. Lendi and Finder Home Loans allow you to compare loan products from the top lenders, including lenders that specialise in bad credit home loans. Keep in mind that you will likely receive a higher interest rate due to your credit standing.
If you are thinking about applying for a home loan, you should start by checking your credit score. Use the tips discussed to begin improving this score, and remember that there are still options available for those with bad credit.