Step 1: Improve your credit


Having a good credit score is pretty important if you plan on buying a home and you’re not an all cash buyer, This is Step 1 of my 8 Steps To Home Buying. When you get a mortgage loan your interest rate will be determined, in large part, by your credit score. The difference of just a few points could seriously end up costing you thousands in the lifetime of your loan so it’s crucial that you try to get that score in good shape and all delinquent debts paid, so when the lender pulls your credit score, there’s no negative activity on the other end.

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Also, a lower interest rate can help lower monthly mortgage payment.  Here are a few things you can do to improve your credit score:



Credit Report

The first step for improving anything, is acknowledging where you are now and where you want to be. So, first and foremost, get your credit report. Mortgage lenders typically look at your FICO score which is different and more specific. This is the score you want to look for. There are plenty of places to do this online and even through some banks. If you get it online, I recommend getting it from an actual bureau itself, or You want a credit report with history from all three credit bureaus. Why? Because each bureau is different and if you have any delinquencies (debt/collections), they may be on one and not the other, so in order to fix them you need all three. 

Any credit score should be used as a guide at this point in time, as there is no way to guarantee that the score you get is the score the lender uses. Your credit score that you get allows you to see approximately where you are, verses where you want to be. 


pay all your bills on time

That’s kind of a no-brainer, but it makes all the difference. Home buyers who do qualify, are sometimes provided with financing that exceeds 90% of a home's purchase price. Building a credit history that shows a pattern of timely payments to creditors for two years or more will improve your ability to qualify for even better financing. 

I read a book called The Automatic Millionaire, by David Bach, David tells you how to make all your finances automatic. He talks mostly about investing, but it’s a good system for bill payments as well.  With online banking it’s easier than you think. So, take a deep breath and let go of some the anxiety surrounding your finances. 

Set up as many bills to creditors as you can through your bank's online system. Banks have some of the best security online so it’s just as safe if not safer than brick-and-mortar banks. (Click here to read USN's post about bank safety).  Make sure your bills are set to be paid a day or two before they are due, just to be sure they are always on time. Banks usually make up for holidays and weekends by sending payments out the day prior. 

By having all your financed bills being paid automatically, you wont have to stress about missing a payment and have more time to live life!


Lower your credit card balances

Keeping a good credit card balance is important not only for your credit score, but for your overall financial health as well. A high credit card balance, in relation to your credit limit, can hinder your credit score. The higher your credit card balance, the higher your minimum payment and the more money you have to pay toward that credit card each month. A high credit card balance also means less credit available for making purchases. Lenders are looking at your DTI ratio that’s your debt to income, that is what tells them how much you can borrow. If you have a ton of debt and not a lot of income then you’re not a great candidate for a loan, you’re too high risk.

When it comes to your credit score, experts say a good credit card balance is between 10 and 30 percent of your credit limit. For example, if you have a credit card with a $100 credit limit, your balance should be less than $30. This is typically measured collectively, so closing a card may cause this number to fluctuate for each card individually. This also means that having a zero balance also affects your score. Never, ever using the cards could actually ding your score down the line. Basically, you want to show some credit activity every month to maintain a good score, but not too much that you can't handle the payments. Once creditors see that you're trustworthy of paying back loans, your credit score will reflect it.  David's book really can help you to understand some of the psychology of money and really help you to get motivated to change it. 

dispute delinquent accounts

Before you pay off any delinquent accounts (accounts in collections), try to dispute them first. You can do this on any of the three credit bureaus. Simply go to their website and search "dispute", directions on how to do so should pop up. Follow the instructions. They typically ask for a reason you are disputing the account, be honest, or find the most truthful response. 

Each creditor has 30 days to respond to the bureau and prove that you truly are responsible for the debt, and the clock starts the second you get a confirmation email. You have about a 50/50 chance (my estimate) that they turn in the paperwork on time, but 50 percent of the time they don't and when they don't guess what? Yep, it drops off your credit history! Why not try? The only thing it costs you is 30 days. It's worth a shot.


Avoid closing unused or old credit accounts

One of the most significant factors of calculating your credit score is your credit utilization. When you close a card, you reduce your overall available credit. Unless you reduce your balance on other credit cards, this will negatively affect your credit utilization rate, lowering your score. Remember, your credit score is measured across all your accounts, so if you close an account, the rest of your balances that remain need to stay below 30 percent.

I recommend not closing any cards if you can. Creditors want to see a long, positive credit history. Your credit history is also a huge positive factor for your score. It is better to try and pay off your credit card then to close it with a balance. I know there are some cases that leave no other option than to close an account, if you must close a card, I suggest paying it off completely, lowering your other balances and then closing it, which at that point you might as well just keep a very low rotating balance that can improve your credit score tremendously. 


Start small

If you do have debt, start small. It's easy to look at all your debt and get overwhelmed or even discouraged. Start with the smallest amount owed and pay it off first. You will instantly feel a great sense of accomplishment, which will then catapult you into your next payment. You’ll soon notice it's easier than you thought, and it’ll begin to snowball until you have paid off all your debt.

If you're new to the credit world, and don't really have any established credit, or your credit score is too low to get a credit card, you can start off small by getting a secured credit card. A secured credit card uses money that you place in a security deposit account as collateral for a credit card. Most times, your credit line is based on your income, ability to pay and the amount of your cash collateral deposit. So if you put down $500, then you get a credit card with a credit line of $500. If the card goes into collection, the $500 belongs to the bank. This ensures a low risk for the creditor so if you don't pay your credit card, it’s not a risk for them. This is a great option for building credit.

The great thing about these cards is once your score is in a good place, you can re-apply to have it rolled over into a real credit card with a higher limit, and get your deposit returned to you.


Allow yourself to get there

I think one of the tricks to financial goals, is not to get in our own way. Sometimes we hinder ourselves of our own success. The art of allowing is a real practice and I practice as often as I can. Your relationship with money is important. If you have a negative or lack mindset around money then try to retrain your brain to let yourself feel comfortable receiving it. You’d be surprised how many people think they don’t deserve financial abundance or if they have more then that must mean others have less. If you don't have a good energy around money, no blogs will help. Check out Marie Forleo and her 6 Little Money Mindset Shifts That Pay Off Huge. This video helped me change my mindset about my finances.

I can't have a blog about money and not mention Tony Robbins! The man knows what he is talking about. Get his book Money Master the Game for FREE and find out exactly where to put your money for financial freedom. This book taught me a lot about saving and investing. I learned what my priorities are, and  and where I stand in my relationship with money.


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