If you’re thinking of buying a home, it’s important to have a good credit score to qualify for a loan. Banks and mortgage companies look at your credit score to determine whether or not they’ll approve a loan based on your credit history.

Before the housing collapse, you could get the best rates on loans with a score of 620 or higher. But now, it’s not that easy to obtain credit, and it’s likely with the S&P downgrade that it’s going to get even harder. So it’s critical that you maintain a good credit rating if you want to buy a home. Current research from Zillow Mortgage Marketplace indicates that you’ll need a credit score of 720 or higher in order to get the best rates on loans.

While building, improving, and maintaining a good credit history can seem like a daunting task, there are steps you can take to improve your credit score.

1. Set clear financial goals and establish a plan to reduce your expenses.
2. Pay all your bills on time – not just credit cards and loans. Any reported late payments can lower your credit score by as much as 100 points. Set up automatic payments to pay your bills before their due date.
3. Pay more than the minimum. Pay down credit cards with the highest interest rates and balances first.
4. Keep your credit card balances low – within 30% of your credit limit. Balances near the top of your credit card limit decrease your credit score, since they signal you’ve maxed out your line of credit.
5. Consider using your savings to pay down any high credit card balances a couple months before you plan to apply for a loan. Also, avoid using your card(s) in the time period between paying down your balance(s) and when you apply for the loan.
6. Limit opening new lines of credit. When you apply for new accounts (credit cards or loans), your credit score loses points (10% of your score). If you must open new accounts, try to space them out by at least 6 months or more.
7. Manage your debt, but don’t move it around. Too much debt from loans and lines of credit can lower your score. However, combining two credit cards into one card, so you can close an account, can decrease your score, too.
8. Don’t close old credit cards. By closing old accounts (10+ years), you can shorten your solid credit history, causing a decrease in your credit score.
9. Monitor your credit report. Inaccurate information on your report can affect your credit score. Check for and dispute any errors immediately with the credit reporting agency (Equifax, Experian, and TransUnion).
10. Use bankruptcy as a last resort. Bankruptcy can reduce your credit score by hundreds of points and will stay on your file for up to 10 years.

By practicing discipline while building and/or improving your credit score, you can establish and maintain a good or excellent score. With time and patience, you can eventually qualify for a mortgage.

For more information on credit basics or qualifying for a home loan, contact Grandview Lending.