This guide will cover how to rebuild credit to qualify and get approved for a mortgage. Do you have a not-so-good credit score, and you are wondering how to rebuild it for a possible mortgage application soon? Credit problems can be very frustrating and expensive, and close to 35%. American adults are currently affected, as they have fair to very poor FICO Scores. You face many difficulties when qualifying for a mortgage or credit card. When you qualify, you pay much more.
Interest rates, insurance premiums, or security than borrowers with decent credit scores. However, it doesn’t have to remain that way; you can work to rebuild it! But you should know that rebuilding your credit will take a lot of work. It is more challenging than when starting from scratch! But it is possible!
In this article, we are going to tell you how you can overcome past financial setbacks by giving you a few basic strategies that you can follow to rebuild your credit score. They are as follows: Start by checking your credit report for errors – many Americans live with many mistakes on their credit reports, and many don't even know. According to a report by the Federal Trade Commission (FTC), about one in every five individuals has some material error on their credit reports, negatively affecting their credit score.
Common Mistakes For Getting Bad Credit
Some of the most common mistakes include the following:
- A missed payment that has been inaccurately listed
- The inclusion of accounts that don’t belong to you
- A closed account or a paid-in-full loan that’s still open
- Or the inclusion of outdated credit utilization information
So, before you even start your rebuilding plan, you need to ensure that the credit score reflected on your credit report isn’t a result of any of these mistakes. Check your credit reports thoroughly to see if there are any errors. If you notice any errors, a reporting process is included in the instructions. So, you can report it, and the credit bureau can investigate and report their finding back to you. And if
they find that the error exists, they will rectify it. Focus on small and regular payments – your payment history is the single most significant factor that directly makes up your credit score, comprising about 35% of the score calculation.
How To Rebuild Credit and Increase Credit Scores To Qualify For a Mortgage
If you want to raise your credit score, you need to make minimum monthly payments on your accounts and probably ensure that you pay off your outstanding credit card balances. By doing this, you will be lowering your revolving utilization, and it also helps you save on interest in the long term. You need to take control of your credit cards and make minimum payments on every account each month. And if you have credit cards you don’t use, resist the temptation of closing them, as that will affect your available credit, thereby increasing your revolving utilization percentage. Instead, how about you make a small monthly charge and ensure you pay your bill immediately?
How To Rebuild Credit and Maximize Credit Scores With Credit Cards
Reducing high-balance accounts – if you have large outstanding amounts on your credit cards, paying them off will undoubtedly raise your credit score. The truth is your revolving utilization makes up about 30% of your credit score, so it is recommended that you put more money into your budget towards debt reduction. So, go through your credit card statements for all your cards, listing everything that you owe. Then look at your budget and establish areas you can cut back and add to the debt payment. You also need to avoid spending extra money on your cards.
How To Rebuild Credit With Consolidating Debt
Think of a debt consolidation loan – it transfers all your outstanding debts to different accounts, combining them into a monthly payment. This helps you enhance your credit utilization rates and ensures you don't miss any payments. The debt consolidation loan is the perfect option for borrowers who may have multiple lines of credit and have difficulty keeping up with the payments. By applying for a debt consolidation loan, you make a hard inquiry on your credit report, which means your credit score drops by a few points immediately after the inquiry. So, you need to make sure that you make on-time payments, which ideally should be above the minimum required once you get the loan.
Consider working with a credit counseling agency – a credit counseling agency helps you analyze your financial situation, enabling you to come up with realistic solutions to address your debt and credit issues. The agency will look at your finances and then offer suggestions on where you can save. They may also contact your creditors and probably even negotiate your payment amounts. However, when hiring such an agency, you must do your due diligence properly.
Ask about their fees, services, and products, as well as their specific pricing. All this is to ensure that the particular agency can help you. Build towards a target credit score – once you have decided to rebuild your credit, and have started taking action towards it, maybe you should set a target credit score. Though a higher credit score is always better, you can aim to get the score to a decent threshold or above.
What Is a Good Credit Score?
You do not need a great credit score to qualify for a mortgage. However, maximizing your credit before applying for a mortgage is wise. The higher your credit scores, the lower the rates. Lenders price mortgage rates based on the borrower’s credit scores. The credit score ranges include;
- Exceptional (800-850) – with such a credit score, you will be able to access loans with the best interest rates as well as the best offers. You can sometimes secure special individualized perks, and many lenders will be interested in giving you a loan.
- Very good (740 -799) – you will also be in an excellent position to secure a good deal with such a credit score. You will have various good options to choose from.
- Good (670-739) – as a borrower in this range, you are safe as you can still qualify for several mortgage options. In fact, according to an Experian study, borrowers in this range only have
an 8% chance of becoming seriously delinquent is pretty good. - Fair (580-669) – you can still qualify for a mortgage in this range, but it will be at a higher interest rate. The options may be limited for you, though.
- Poor (300-579) – lenders see a borrower in this range as a very high risk, and one may have to pay a deposit or a fee in exchange for the loan or may sometimes be refused by the lenders altogether. If you are in this category, you may want to start a credit rebuilding plan immediately.
How Long Does It Take To Rebuild Credit To Qualify and Get Approved For a Mortgage
How long will it take to rebuild your credit? You should remember that credit missteps and misfortunes fade eventually –but it is with hard work and might take a while before you get to the eligibility level. Now, the time it takes to rebuild your credit entirely depends on how your situation was and is currently. Financial issues may linger on your credit report for years, such as missed payments, collections, and bankruptcy. However, if you keep doing the right thing, you will see positive credit improvement, which will help counter the big negatives.
Begin working on your credit report immediately, and depending on how hard you work. You might start seeing results sooner than expected. The bottom line Your credit score is very important to your financial life, and the fact that you are researching ways to rebuild your credit proves that you think so too.
Now, once you start rebuilding your credit, you need. Ensure that you follow good credit habits and monitor your credit reports often to gauge yours. Progress and keep an eye on any problems that may arise. Also, and most importantly, ensure that you pay your bills on time and always keep an eye on your credit balances. Remember that it is possible to fully rebuild your credit and take it back to where it once was. Even though the process might be slow and tedious, remember that each slight improvement is always a step in the right direction.