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Your credit score, alongside your total income and existing debt, plays a key role in the process of determining whether you qualify for a loan and the specific terms you’ll be eligible for. Understanding and managing your credit is a fundamental step towards securing the financing you need to achieve your financial goals. Here are 8 ways to improve your credit to be aware of as you work toward your financial and home ownership goals.

Credit score and mortgage options article image showing a woman's arm, holding smart phone with a credit score rating graphic on the screen

  1. Review and Rectify Credit Report Errors to Improve Your Credit
    The first essential step is to meticulously review your credit report. Mistakes are not uncommon, and rectifying them can significantly impact your credit standing. It’s possible that you’ve been unknowingly paying for someone else’s financial mismanagement. Correcting these errors is an important way to ensure that your credit report accurately reflects your financial history. The Consumer Financial Protection Bureau (CFPB) has a detailed web page with helpful links that explains how to dispute an error on your credit report.
  2. Managing Credit Card Balances
    Effectively managing your credit card balances is another key aspect. Whenever possible, strive to pay off your entire credit card balance every month. This responsible approach showcases your financial prudence to potential lenders. However, be cautious about transferring credit card debt from one card to another, as it could potentially have a negative impact on your credit score.
  3. Avoid Maxing Out Credit Cards
    Keeping a good credit score also involves not maxing out your credit cards. It’s advisable to use a lower percentage of your available credit to demonstrate responsible credit usage. Maxing out your cards can negatively affect your creditworthiness.
  4. Timing Matters
    When you’ve faced credit difficulties in the past, waiting for about 12 months before applying for a mortgage can be beneficial. Lenders tend to be less critical of financial hiccups when they occurred some time ago. This grace period allows you to rebuild your credit history.
  5. Big Purchases and Credit Cards
    While you’re in the process of applying for a mortgage, it’s wise to refrain from making big-ticket purchases on credit cards. Large expenses on your credit cards can increase your overall debt load and potentially impact your ability to secure a loan.
  6. New Credit Card Accounts
    Opening new credit card accounts shortly before applying for a mortgage is generally not advisable. It’s important to maintain a balance between the amount of available credit and your financial responsibilities. Too much available credit can potentially lower your credit score.
  7. Shopping for Mortgage Rates
    When you’re actively searching for a mortgage, consider shopping for mortgage rates all at once. Making too many credit applications within a short timeframe can potentially have a negative impact on your credit score. However, it’s important to note that multiple inquiries from the same type of lender are typically counted as one inquiry when made within a limited period.
  8. Steer Clear of Finance Companies
    In your journey toward securing a mortgage, it’s prudent to avoid finance companies, even if you’re confident in your ability to make payments on time. Finance companies often charge high-interest rates, which could be perceived as a sign of poor credit management. Opting for traditional lenders is usually a more favorable choice.

This advice, aimed at helping you manage your credit wisely, is vital when it comes to preparing for major financial milestones like home ownership. By following these recommendations, you can enhance your creditworthiness, making it easier to qualify for loans and secure favorable terms. Remember that responsible credit management is a journey towards achieving your financial goals.

Please note that this information is provided for general guidance and is not a substitute for personalized financial advice. To learn more about managing your credit, visit the Credit Basics page at FannieMae.com.

 

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