If you're on the market for a new home
, a bad credit score can stop your plan it its tracks.
While good efforts over time is the only way to significantly improve your credit score, there are many ways to help expedite the process. Read on for tips to increase your chances of getting a mortgage if you have a history of bad credit.
How is your credit score determined?
When applying for a home loan, lenders will check your credit score to determine how much of a risk you are before they give you a mortgage. Credit scoring software calculates your score based on five major factors:
- Your payment history
- The amount of your debt
- The length of your credit history
- The types of credit you use
- What kind of new credit you have
Improve your payment history
Late payments and past-due bills can wreak havoc on your score. If you have debts piling up, it's time to start staying on top of your payments.
- Start paying your bills on time every month--and not just the minimum payment. Eliminate your past-due bills.
- If you have any collection agencies after you, get those delinquent accounts paid off. While the delinquency will not disappear from your report immediately after it is paid off, it is certainly better for your score than an unpaid debt. The sooner you pay it off, the better off you will be.
- If you have bills you can't pay off in full, contact your creditor to negotiate a payment plan.
- If necessary, contact a non-profit credit counselor to help you organize your payments and get your debt under control.
Keep debt low
Reducing your debt is imperative when improving your credit history.
- Maintain a low balance on all accounts.
- Don't move your debt around to different accounts. Having fewer open accounts with higher debt is worse than having more accounts with lower balances.
- If you have any unused accounts, don't close them--accounts with a zero balance will increase your credit-to-debt ratio and raise your score.
Be smart with new credit
If you're opening new accounts or taking out new loans, make sure to use your new credit to your advantage to improve your score rather than harm it.
- Attempts to open several accounts close together on your credit report will lower your credit score.
- However, if you have a bad credit history, opening a new credit account can improve your score if you use it responsibly and make payments on time. Refrain from opening several new cards at the same time--this can actually hurt your score and appear to be risky behavior to a lender.
- Having a mixture of credit on your report--such as credit cards and installment loans, can help raise your score if you manage them properly and stay on top of your payments.