So, what do you do if your credit reports make you want to hide under the covers and never use your credit cards again? Relax, you can turn your ratings around.
Mortgage lenders look at the "age," dollar amount, and payment history of your different credit lines. That means opening accounts frequently, running up your balances, and paying on time or not at all can impact your credit score negatively. Just changing one of these components of your spending behavior can positively affect your credit score. Also, bad credit does not necessarily mean you can't get a mortgage, it will just come at a higher cost.
If you are having trouble getting a loan, ask your lender why. Chances are it will be one of these reasons for rejection:
- Overextended credit cards: If you miss payments or exceed your limit, that's a red flag to lenders.
- Failure to pay a previous or existing loan: If you have defaulted on other loans, a lender will think twice.
- Bankruptcy: Filed for bankruptcy in the past seven years? You might have trouble getting a loan.
- Overdue taxes: Lenders check your tax payment record.
- Legal judgments: If you have a judgment against you for such things as delinquent child support payments, it could harm your credit.
- Collection agencies: Lenders will know if collection agencies are after you.
- Overreaching: You might be seeking a loan outside what you can reasonably afford.
Many financial experts suggest common sense strategies to turn your credit report around:
- Always pay your minimum balance on time. Let's face it, credit card companies make profits on you when you maintain a balance. Just make sure you send them their due each month. Better yet, only spend what you can expect to pay back at bill time.
- Try to reduce balances. Even throwing in an extra $20 to $50 each month will help reduce the overall debt, and paying extra looks good on your credit report.
- Don't run up the entire balance: Having $100 left on a $10,000 line of credit doesn't look so hot. Lenders look at the dollar amount of credit available to you and, from there, what percentage of that credit you have used. In other words, if you have a card with a $1,000 limit and you've spent $900 on that card, you've used 90% of your available credit; this looks a lot worse than having a balance of, say, $200 on the card.
- Throw away new credit card offers. Don't apply for new cards and lines of credit right before you go home shopping. And when those clerks in the stores offer you a discount if you just open an account, say no. Banks will not turn a blind eye to numerous inquiries for new credit.
If bad credit continues to dog you, the FHA loan programs may be your ideal option. With down payments as low as 3.5%, Americans with good and bad credit have been getting into their first homes with these federally insured loans since 1934.
Having bad credit is not the end of the world. It still may be possible for lenders to give you a loan, provided your credit score is not too low. But be aware that you may pay a higher interest rate and more fees since you are more likely to default (fail to pay the loan back).
There are ways you can improve your credit score, such as paying down your debts, paying your bills on time, and disputing possible errors on your credit report. But on the flip side, there are ways you can also hurt your score, so remember:
- DON'T close an account to remove it from your report (it doesn't work).
- DON'T open too many credit accounts in a short period of time.
- DON'T take too long to shop around for interest rates. Lenders must pull your credit report every time you apply for credit. If you are shopping around with different lenders for a lower interest rate, there is generally a grace period of about 30 days before your score is affected.
In addition to cleaning up your debts, you also need to check your credit report to make sure it is accurate. This is important: Items that are just plain erroneous can stay on your report for up to 10 years if they are not disputed. By disputing it, you put the wheels in motion to clean up the report and get a better mortgage. Your credit bureau will attempt to get the disputed items deleted from your report by contacting the creditors involved. After 30 days, if the creditors do not respond, the item is deleted from the report. (You can also contact the creditors yourself.)
Even after you reverse the downward spiral of your credit history, you might need to tell a prospective lender that there may be some signs of bad credit in your report. This will save you time, since he will look at different loans than he might otherwise.