When purchasing a home in Honolulu, you are most likely going to need to take out a home mortgage loan. Before you start the loan application process, however, you may want to take some steps toward improving your credit. In fact, if your credit is too poor, you may have no other choice but to work on improving your credit before you will even be eligible to take out a mortgage loan. Fortunately, the steps toward improving your credit are relatively easy, so long as you are able to stick to your credit recovery plan.
Knowing How Your Score is Calculated
First, it is helpful to understand how your credit score is calculated. You may be surprised to learn that you may have dozens of credit scores calculated by various agencies, but all of these scores are determined by using the information contained on the three credit reports maintained by Equifax, Experian and TransUnion. The most common score, however, is the FICO Score, which ranges from 300 to 850. In addition, regardless of the scoring system used, the same factors will affect your score. The only real difference between these various systems is the degree by which these factors will affect your score. These factors include:
- Payment history on loans and credit cards
- The amount of revolving credit you regularly use
- The amount of time your accounts have been open
- The types of accounts you have
- How frequently you apply for new credit
By understanding the factors used to determine your credit, you can better determine how to go about improving your score.
Improving Your Credit Score
The simplest way you can go about improving your credit score is to pay your bills on time. Paying late or settling an account by paying less than what you originally agreed will have a negative impact on your score. This includes not only loans and credit card bills, but also rent, utilities and phone bills. Using automatic payments or calendar reminders will help to ensure you get your bills paid on time. Remember that late payments can remain on your credit report for seven years, though older late payments will have less of a negative impact than newer ones.
If you have been making utility and cell phone payments on time and you want to ensure this is positively reported on your credit report, you might want to consider signing up for the free Experian Boost. This opt-in product allows Experian to connect to your bank account to verify your utility and telecom payment history. This information will then be included in your FICO Score. By signing up for the program, you will also immediately receive a free credit report and FICO Score.
You can also improve your credit score by paying off your debt and maintaining low balances on your credit cards and other forms of revolving debt. Carrying $2,000 worth of debt on a credit card with a limit of $2,500 will have more of a negative impact than carrying that same debt with a credit limit of $25,000. This credit utilization ratio tells lenders how far you have stretched your finances.
Other steps you can follow to help improve your credit include applying for new credit accounts only when needed, keeping unused credit cards open and disputing any inaccuracies that you find on your credit reports. Even the smallest of errors can have a significant impact on your credit score.
