Having bad credit can really make the home buying experience a difficult one. Now having a decent income can still afford you the opportunity to get an auto loan or a mortgage, it comes with a catch. That catch is a higher interest rate. So when compared to a borrower with good credit, someone with poor credit can expect to pay $50,000 more in interest on a mortgage. Ouch! Don’t let that fact, however, deter you from working towards achieving your dream of buying your own home. While it will require some time and effort on your part, if you have bad credit there are steps you can take to turn things around. Check out the tips below!
Get Clear on Where You stand
Before you can begin to even take steps to repair your credit, you need to have a clear picture of where you stand. This will allow you to formulate a game plan that will work for you more efficiently. So how do you figure out where you stand when it comes to your credit? Simple. You want to start by getting copies of your full credit reports from all three bureaus (Experian, TransUnion, and Equifax). Now you’ll find that there are a couple of sites out there that offer free reports, but you should make sure to check the fine print. Some sites will offer a free report as part of a “free trial”, which if not cancelled by a set amount of time turns into an automatic monthly subscription or they may charge a small fee. Now credit scores can range from 300 to 850. If you want to qualify for the lowest mortgage rates, you’re going to want a score of 740 or above. If you discover that your score is below 740 though, don’t fret, as there are steps you can take to build your credit score back up.
Dispute Any Errors
Yes, unfortunately errors do occur and those errors may be costing you. Once you have your full credit report, the first step you want to take is to thoroughly run through it to check for any errors. You can start with the basics by checking to make sure that your identity information (spelling of your name, address and Social Security number) is correct. You’ll then want to move on to your credit history to review the list of credit cards, outstanding debts, and major purchases listed in each report. If you see any mistakes or items that seem questionable, be sure to make a copy of the report and highlight the error in question. You then want to gather any information that you have that can help you to prove the item in question is indeed an error and make copies of this as well. This can include bank account statements or receipts for the items in questions.
Got all your stuff together? Great, now it’s time to start disputing. Write a letter to the specific credit-reporting agency (Experian, Equifax, or TransUnion) that contains the error in question. Give an explanation for the error in question and include a copy of the highlighted report along with any all documentation you have to prove your case. You’ll want to send the letter by certified mail to ensure its arrival and keep a copy for yourself. The reporting agency will then have 30 days from the time they receive your letter to issue a response. If you find yourself a little unsure of the process or need some advice on contacting the credit bureaus about discrepancies the Federal Trade Commission provides some good information. Here are the contact numbers and web sites for the three credit bureaus:
Yes, you need a budget. Let’s be honest, you need to look at where you’re spending frivolously and where things can be cut. Not having a budget in the first place more than likely is part of what has led to the situation at hand. Before you start beating yourself down though, understand that all is not lost and that there are steps you can take to avoid sinking lower into bad credit. A good place for you to start would be to review your tax returns for the past two years. This will help to give you a good idea of how much money you actually take home in a year. Knowing this will allow you to sit down and create a budget plan that is realistic.
You want to look at what your regular monthly expenses are (rent or mortgage, car payments, and home, car and health insurance) and then subtract these from your current income. These are your must get paid without a doubt. Next, you’re going to want to create a list of your monthly spending habits for other expenses such as gas, groceries and entertainment. These are areas where you have a bit more room to play with when it comes to budgeting. Work on creating a limit, based on your income, of what you can spend in each of the different categories of expenses. For instance, if you generally spend $400 a month on groceries, try to bring it down to $300 a month by making a few changes to your purchasing decisions.
Pay On Time
This one is very clear-cut and dry: Pay all of your monthly bills on time, period! Not keeping up on your payments is how you get into trouble and in order to repair your credit it is a habit you want to break. If you are behind on any bills, now is the time to get serious and get caught up as soon as you can. On-time payments are the single most important factor to your credit score, and your credit won’t improve until you can consistently pay every bill on time.
Credit Card Balances
Okay, it’s time to get down to business and take charge of your credit cards. If you have any outstanding balances, make room in your budget to pay down these debts consistently every month bit by bit until you are completely done with them. It is important that you know your credit limits and ensure that you stay well under the maximum when charging items. Why is this important? It is important because debt is analyzed by ratios. This means that if you charge, for instance, $500 on a card that has a $1,500 limit, you’ve used 33%. Now if you were to charge the same amount on a card with a spending limit of $1000 you’ve used 50%. Using 33% as opposed to 50% of your limit is a better move for your credit score and either is definitely a better move than maxing out your cards. Remember: the total amount of available credit affects your score, even if you owe nothing, pay them down and avoid closing credit cards. You particularly want to avoid closing credit cards that you’ve had a long time as this negatively impacts an important factor of your credit score: the length of your credit history.
No New Cards
Last, but not least, resist the temptation to open a new credit card. It can be very tempting, but every time you apply for credit it is listed on your credit report as a “hard inquiry”. Having too many of these “hard inquiries” within a two year span will cause your credit score to suffer. Be patient. It can take you a couple of months or maybe even a couple of years for your credit score to improve, but if you plan on buying a new home, that wait is well worth it.