Whether you are buying your first home or an investment property, one of the most significant steps you will ever make is improving your credit score. The better the credit score, the better the terms of the loan, including even the interest rates and other aspects of the loan approval process. In this article, we will look at some of the key steps one must take to improve the credit score to increase the chance of a loan for the property.
Why Your Credit Score Matters for Property Loans
Your credit score plays a significant role in determining whether you qualify for a property loan. Lenders base their decisions on your score regarding how capable you are of paying your debt. The better your credit score, the more reliable you appear as a borrower, and the better terms a lender can offer you.
Generally,
- Excellent credit (750+): Most likely to get the best interest rates available.
- Good credit: 700–749 offers the borrower competitive rates.
- Fair credit: 650–699, a borrower will have higher rates and possibly very strict conditions.
- Poor credit: below 650, it might be very hard to qualify or to have very high-interest rates.
Improving your credit score before applying for a loan can make a huge difference in how much you’ll pay over the life of the loan.
The Complete Guide to Improving Your Credit Score
1. Check Your Credit Report
Before you start the repair work, you’ve got to know what to expect. You can request your credit report from all major credit bureaus: Equifax, Experian, and TransUnion. A free report is available for all users once every 12 months on AnnualCreditReport.com.
Look for:
Mistakes: Inaccurate personal information, accounts you don’t recognize, or accounts that are reported as open but have been closed. Contest any errors you find.
Negative marks: Late payments, defaults, and collections. These can dramatically lower your credit score and will have to be worked on.
2. Pay Your Bills on Time
Your payment history is usually the most critical determinant of your credit score, holding about 35% of the weight. One of the easiest ways to bring up your score is to just make on-time payments. Set up reminders to help you make payments when they are due, or arrange for automatic payments.
If you have missed some payments in the past, work on clearing up any outstanding balances to show a consistent track record of timely payments.
3. Reduce Credit Card Balances
Your credit utilization ratio-the percentage of your credit limit that you are currently using-also has a major impact on your credit score. Ideally, you should not use more than 30% of your available credit on any card.
- Pay off credit cards as much as possible, if you have high balances, before applying for the property loan.
- If at all possible, do not create more debt by cutting back on non-essential purchases.
4. Avoid Opening New Credit Accounts
Although the temptation to open new credit cards in hopes of raising your score might be great, doing so right before applying for a property loan will hurt you. Each time you apply for a credit card, there is a hard inquiry to your credit report, and that can temporarily lower your score.
If you are going to be applying for a mortgage or property loan anytime soon, do not open any new credit accounts.
5. Work on Paying Delinquencies
Delinquencies such as missed payments, defaults, and collection can really bring down a rating. While some negative marks remain on your credit report for several years, the big factor is paying off your delinquencies and even negotiating with creditors.
- Negotiate settlements: For accounts in collections, call the creditor or collection agencies to try and negotiate a settlement. Paying off debt for less than what is owed, if accepted by the creditors, sometimes removes the negative mark.
- Request goodwill adjustments: If you have ever missed a payment for one of those extenuating circumstances, consider asking creditors for a goodwill adjustment to remove the late payment from your record.
6. Consider a Credit-Builder Loan
If your credit score is lower than you’d like, consider a credit-builder loan to help you establish, or rebuild, your credit. These loans are designed specifically to help people with low or no credit history raise their scores.
- Make on-time payments to build your credit.
- Check with local credit unions or online lenders that offer those types of loans.
7. Keep Old Accounts Open
15% of your credit score is based on how long you have had credit. If you have older accounts in good standing, it may be to your benefit to keep them open, even if you are not using them on a regular basis.
Closing older accounts can shorten your credit history, which could affect your credit score. Just make sure these accounts don’t carry high fees or tempt you to overspend.
8. Monitor Your Credit Regularly
Once you finally begin to improve your credit score, it’s important to monitor it on a regular basis. Most services offer free tracking of your credit score, while some credit card companies offer updates on a monthly basis.
By keeping a close eye on your credit score, you can see how your efforts are paying off and make any necessary adjustments along the way.
Conclusion
While improving your credit score to get a property loan does take some time, it is well worth it. Pursuing these actionable steps-checking your credit report, paying bills on time, reducing credit card balances, and addressing delinquencies-you can make certain of better prospects in terms of getting a good property loan.
The better your credit score, the better the terms for your loan will be, ultimately saving you money over time. Whether it’s buying your first home or building a portfolio of properties, taking a little time now can go a long way toward getting the right finance for your property goals.
