When you are considering the purchase of a home or residence including a condo or town home the biggest challenge is money. We never seem to have enough money, do you have $200,000 in Cash sitting in the BANK? Of course not. Why would you…If you had $200,000 in liquid assets it would likely be in Stocks, Bonds, Mutual Funds or your 401K. Could you Cash in your 401K, to purchase a home? YES, but for most that would not be wise. Since we don’t have the money sitting in the bank ready to buy something you will likely need a mortgage.
A mortgage lender will complete a thorough analysis of your current debt obligations such as; Car Payments, Credit Cards, Student Loans, Store Credit Cards, Gas Credit Cards, and your Cell Phone Debt Obligation, if you are paying a monthly fee for your cell phone. All of these Debt’s go into an equation for DEBT TO INCOME…What is your current debt to income, and what will your debt to income be when you add, Mortgage, Taxes and Insurance? The debt to income is something we will cover on another blog, but today we are going to talk about having a high FICO score, or a high credit score.
- Have limited lines of credit. Make sure you only have 1-3 lines of “revolving credit.” That would mean 1 Credit Card, 1 Gas or Store Card, and 1 cell phone line of credit. It’s that crazy that your $39 for your Verizon Cell phone payment is a line of credit.
- Low Credit Card Balances. Make sure your lines of credit are less than 30% of the available Credit..(sadly it is better to have ‘some’ credit than NONE ). Example, you have a Capital One Credit Card with an available line of credit of $3000, then you want your average revolving debt to be less than $900. My suggestions is to use less than $1000/per month and try to pay $300 – $800 off each month. It is “Wrong” but the credit companies want to see a balance on there. MY ONLY CAVEAT, is YOU CAN PAY the TOTAL down every couple of months, so your balance is ZERO.
- Pay off LOW BALANCES. You probably have one of two cards with less than $300 balance and you are paying $25 -$50 a month on those cards, and the cards just linger. Bite the Bullet (Not at the expense of missing other payments) and get focused for a month or two and pay these debts down to ZERO. Once you have done that, LEAVE the cards OPEN. For short term improvements to your credit it is good to leaves these open. It shows a trend of being responsible with your credit lines, and a trend of making “more than the minimum” required payment. These are good trends for you.
- Pay your bills on time. It should go without saying this is probably the most important trend to have over the lifetime of borrowing. I am going to go one step further and suggest; Make and Extra Payment once or twice a year to Long Term Debt like Car Payment or Student Loans. It isn’t to difficult if you space your extra payments out on a quarterly basis. Figure you are making $400 car payment, then in April when you get your Tax Return, take some of that money and make extra payment towards your car. Or maybe you have $300 student Loans how about instead of going out to celebrate your birthday, you send an extra student loan payment in. (it isn’t fun WHEN you are paying down debt)…but a life not held in slavery by debt is FUN!!
- Check your Credit Yearly. There are plenty of ways to get “free credit reports” but do you know why they are FREE? Because the website is great at marketing and selling you other services that you likely do not need, so in the END that FREE REPORT, just costs you $50/month in credit watching service. More importantly the report is not very helpful, it is full of Charts, Graphs and Data that you don’t need…Instead, call your local Realtor and ask them for their trusted mortgage broker and have them run your credit. It will probably cost you $30-$40 but that is a small price to pay for quality information. Then go through it with a fine tooth comb to make sure the creditors are accurately reporting. If you see something that isn’t accurate, call them speak to them. Ask they to correct the mistake you will most likely have to send a letter but it will get fixed if you take the 10 minutes to write the letter and toss it in the mail.
- Don’t open NEW ACCOUNTS. If you have 1-3 lines of credit, then there is no need to open new accounts. This will only hurt you in the long run. There is an idea that You could consolidate 4 cards with balances varrying from $300 – $2000 onto ONE card with ZERO PERCENT INTEREST…and you will save yourself “thousands” of dollars in interest…this is just not true. Your better off following step 3, paying off the low balances first, then going after the bigger balances. This sets up TRENDS of payments that the lenders like to see. The Debt SNOWBALL is a tool you could use to help organize and pay down your debt more rapidly.
All of the above are things I have done to increase my credit score. However the truth is in doing these things I have become much more aware of how “dependent” I was living on Credit. In the past decade I have since “cleaned out the closet” and have gottten rid of ALL but ONE credit card with a low line of credit…NOT EVEN $2000…and I only use this card in the rarest of times, and I generally pay the balance to Zero every other month or two when it is used. Most of my bills are paid with the use of a Debt Card, and I go through my bank statements monthly to ensure I am living within my set budget. It is these life choices that allow me to live without feeling like a slave to the lender, as it is written in Proverbs, 22:7 “The rich rule over the poor and the borrower is slave to the lender.”