As a future home buyer, nothing can dash your hopes of owning your dream home faster than a credit mishap. Without a good credit score (and history), you’re going to find it next-to-impossible to secure a low-rate, low-interest mortgage and mortgage
In this post, we look at a few little-known factors that can damage your credit score. Many of these are things some aren’t even aware of – and it’s a great idea to get to grips with them sooner rather than later, to avoid potential problems later down the line, when you come to actually apply, and take out a mortgage.
Factor #1: Too Many Inquiries
Each time you make an inquiry, in terms of taking out credit, you’ll be leaving a small “mark” on your credit report. For example, say you’re trying to get a new credit card, and you make a few different applications…
Each one of these applications leaves a mark on your credit report, which is visible to lenders, and generally-speaking, affects your score negatively.
The more credit inquiries you’re seen to be making, the more a lender may view your financial situation as unstable… so even if that’s not the case, it’s always worth limiting your credit applications to times when it’s absolutely necessary, or when you don’t plan on making further applications for at least 6 months.
Factor #2: Incorrect Information On Your Report
Despite the regulation surrounding credit institutions, mistakes happen more regularly than you think, and this is one of the key reasons it’s so important to check your actual credit report from time to time.
Mistakes that appear on your report can be as “minor” as one payment showing as late – when in reality it wasn’t – and by monitoring your report, and ensuring all information is accurate, and up-to-date, you’ll help to ensure that your score is as high as possible.
If you do notice mistakes, it’s important you contact the lender right away. Do NOT contact the credit agency themselves, as most of the time, they’ll direct you to the lender anyway – and the sooner you make the lender aware of any problems, the quicker they can rectify them, and inform the credit agency of the problem.
Factor #3: Using Too Much Of Your Credit
While it’s good to use your credit accounts and cards regularly (along with making regular, on-time payments), using too much of your credit is a big ‘red flag’ to lenders, as it shows that you depend – financially – too much on your credit.
Regardless of whether you make each month’s payment exactly on time, if you’re constantly maxed out on your credit card, and find yourself paying it off each month, only to find you’re not actually paying it off – only making the minimum payment – then it’s going to appear as a negative to lenders, particularly those who offer mortgages.
The amount of credit available to you, and the amount you use is known as a credit utilization ratio, and where possible, you should always try to aim for a ration of less than 50%. This means, for example, that if your total credit card available balance is $2,000, you should try to never be more than $1,000 “in” to it.
This will help your score, and show lenders that you don’t rely financially on credit, making it more likely you’ll get a better rate, and a better deal on your mortgage and any other credit products you apply for in future.
Factor #4: Not Using Your Credit
The previous factor talked about using too much of your credit…
But did you know, not using enough of your credit can be just as bad, in terms of the negative impact on your score?
The reason behind this is clear-cut; if you’re not using your credit, you’re not building a credit score, and to lenders, this is – unsurprisingly – yet another red flag.
This is why many financial advisors and credit-building guides will advise you to use your credit cards – so long as you manage to meet your monthly minimum payments – and after 6-12 months of doing so, you can begin to show lenders that not only are you able to live with your credit responsibly, but also that you’re not dependant on it, if you’re not going into your credit limit too much.
Even a single credit card, with a few monthly outgoings, and on-time monthly payments can help to improve your credit score quite drastically, and it’s worthwhile taking the time to explore this option if you’re not yet using credit, as it can help your applications for credit, in future.
Conclusion
Credit scores may seem confusing – and the way they work, in many cases, is complex – but as long as you’re meeting monthly payments, avoiding defaults, and aren’t using too much of your credit – more than you can afford – you shouldn’t have any problems building your credit rating, and preparing for your first mortgage or home loan.
Use the tips above, and be cautious of the little-known pitfalls that can negatively affect your credit score. It’s worthwhile keeping an eye on your report – and it’s cheap, too, with the average credit report plan costing between $10 and $20 a month; a small price to pay for peace of mind!