How To Rebuild Credit To Increase Your Credit In Six Months

One of the most frequently asked questions is how to rebuild credit to qualify and get mortgage approval. Are you planning to buy a home soon? If so, there are a few things that you need to keep in mind. For instance, having a good credit score is essential for getting approved for a mortgage. Alex Carlucci explains the importance of credit scores when it comes to getting credit:

The lenders use the credit score when determining a borrowers creditworthiness, where a low credit score makes it difficult to get approved, or even when you have been approved, you end up paying very high-interest rates. Fortunately, though, there are steps that you can take to rebuild your credit, hence improving your chances of getting approved for a mortgage.

This is what we will discuss in this article – we will look at a credit score, how it affects your mortgage eligibility, and, most importantly, how you can rebuild your credit to boost your chances. We can tell you that this process won’t be easy! It will take time, patience, and effort, but it will all be worth it.

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What Is Your Credit Score?

One of the first questions loan officers will ask is, what is a credit score? In simple terms, the credit score is a numerical rating representing an individual’s creditworthiness. Based on their credit history. It is a three-digit number ranging from 300 to 850, with a higher score. Indicating better creditworthiness. Angie Torres of Preferred Mortgage Rates explains the importance of credit scores and who uses credit scores:

Credit scores are used by lenders, such as banks and credit card companies, to assess the risk of lending money to a borrower. When calculating the score, the credit bureaus analyze factors such as payment history, credit utilization, the types of credit, length of credit history, and recent credit inquiries.

So, essentially, high scores tell the lenders that you can pay all your credit on time and that you don't borrow more money than you can pay, while a lower score indicates that you might be a credit risk, making it difficult to qualify for a loan.

How Are Credit Scores Determined

How exactly is the credit score determined? There are three credit bureaus in the United States, namely Equifax, Experian, and TransUnion. Timely payments in the past 12 months are very crucial. One late payment can plummet credit scores and affect mortgage approval. Here is what John Grimaldi of Superior Lending in Las Vegas, says about credit card companies:

Here we are talking of things like paying your credit card balances before they are due or ensuring you pay your bills on time. Doing this lowers your revolving utilization, helping you save on interest in the long term. Regarding your credit cards, most card companies make it easy for borrowers who may want to make minimum regular payments.

Credit card companies make technology user-friendly by sending notifications when payments are due. Credit card companies make it easy for individuals to schedule auto payments in advance. Based on each bureau’s data, these three bureaus may have slightly different credit reports for a specific borrower. However, the credit score should be similar. With that said, here is a rough breakdown of how credit bureaus calculate scores:

How To Rebuild Credit With Late Payment History

Timely payment history in the past 12 months is crucial when qualifying for a mortgage. You can have outstanding collections, charge-off accounts, and other derogatory credit tradelines. You do not have to pay outstanding collections and charge-offs. Late payments that are older than twelve months are fine and often ignored. However, you need timely payments in the past twelve months to get an approve/eligible per the automated underwriting system.

It is better to have lower credit scores with timely payments in the past 12 months rather than high credit scores with late payments in the past 12 months to get an approve/eligible per automated underwriting system.

Payment history – your payment history accounts for the biggest share when calculating your credit score. It accounts for nearly 35%, which includes factors such as how often you make or miss payments, the number of days on average your late payments are overdue, and how quickly you make payments when you are overdue. So, this is to tell you that every time you miss a payment or are late, you create a negative payment history, affecting your credit score negatively.

How To Rebuild Credit With Credit Cards

Credit card debt and current loan – accounting for about 30% of your credit report, your current debts, which comprise the amount you owe, the types of cards you have, and the amount of credit available, also play a huge role in your credit reports. In addition, maxed-out credit cards, as well as high loan balances, are also taken into consideration when calculating your score.

To rebuild credit and maximize credit scores, make sure to have a low credit card balance. High-credit card balances will lower your credit scores.

High-balance credit cards will impact negatively impact the score. In contrast, a low balance raises the score. The length of the credit history – the longer the credit pattern, the higher the chances of you following the same credit patterns, which improves your credit score. The credit history accounts for about 15% of your credit score.

How To Rebuild Credit With Diversified Credit Types

Account diversification – having mixed types of accounts, including home loans, credit cards, and installment loans, also positively impacts a borrower’s credit score. Mike Gracz of Preferred Mortgage Rates says the following on how to rebuild credit:

The best way to rebuild credit to qualify for a mortgage is to get three to five secured credit cards with a $500 credit limit on each card. Get two to three credit rebuilder account for maximum score improvement. As time ages, your credit profile will get stronger. Add yourself as authorized user from credit cards of family. Make sure the main user has low credit card balance and perfect payment history.

You should have a diversified credit profile. However, do not buy an auto for the sake of having an auto loan. Getting three secured credit cards and two credit rebuilder accounts will do the trick. This accounts for about 10% of your credit report. Having different types of credit tradelines will strengthen your credit profile.

Recent Credit Activity on Your Credit Report

Recent credit activity – last but not least, your recent credit history is also considered when calculating your credit score. So, it would be best not to do anything that would suddenly increase your credit.

Do not apply for unsecured credit cards if your credit scores are below 680 FICO. You will not get approved. The hard credit inquiry can drop 10 points. Check your credit report for errors and accuracy.

Do not open many credit cards, which may make the lenders believe you are in financial trouble. This accounts for about 10% of your credit report.

Check For Accuracy and Errors on Credit Report

How can you rebuild your credit? If your credit score takes a hit or is lower than required, how can you improve it? The truth is
financial hits may happen to anyone. When they do, very often than not, we find ourselves missing a payment or two, as we have seen. This hurts our credit scores. Alex Carlucci of Preferred Mortgage Rates said the following about credit, credit reporting, and consumer credit scores.

The score could also be affected by other factors. But what can you do to rectify the score? Here are some steps you can take to improve your situation: Check your credit reports for errors – errors on credit reports are very common, and not so many people are even aware of them. According to the U.S Federal Trade Commission (FTC), about one in every five individuals has some material error on their credit report. These errors are bad news as they negatively affect your credit score, which lowers when it should be higher.

Some common errors to watch include including accounts that aren’t yours. Inaccurate listing of missed payments can happen. Credit bureaus do make mistakes. A closed account or one paid in full is still open. In this section, we will include outdated credit utilization data. When trying to rebuild credit, you first need to establish accurately that the low score isn’t a result of a mistake.

The Importance of Timely Payments in the Past 12 Months.

Focus on making regular payments. As mentioned above, your payment history is the most contributing factor to your credit score, comprising about 35% of the scores. Alex Carlucci of Preferred Mortgage Rates explains credit repair companies as follows:

Credit repair companies may contact your creditors and negotiate your payments. Now, when hiring a credit counseling or repair agency, you need to consider everything, including fees, products and services, and specific pricing, for you to be able to get the best deal.

The team at Preferred Mortgage Rates highly does not recommend consumers hire a credit repair company. Whatever a credit repair company does, you can do it yourself. One of the quickest ways to increase your credit score is to make minimum payments on your accounts every other month.

The Best Ways To Rebuild Credit Is Never Close Active Credit Tradelines

In addition, if you have cards you don’t use but are still open, do not close them, as doing so may lower the available credit and increase the revolving utilization percentage. So, how about you make small charges on these particular cards every month instead of closing them? And also, make sure that you pay off the bill immediately. Alex Carlucci explains credit tradelines as follows:

The longer to hold on to an active revolving credit accounts such as credit cards, the stronger you credit profile gets. Never close out an active credit tradelines. Credit tradelines are important when qualifying for a mortgage.

Minimize the high-balance accounts – the other way to rebuild your credit score would be to minimize the amounts you owe on your credit cards. As we already mentioned, revolving utilization makes up about 30% of a borrower's credit score, which is why it is important to put some focus on debt reduction as well. So, take your credit statements and list everything you owe, and then looking at your budget, identify areas where you can afford to cut back. No matter how small the amount, every dollar you put into your debt will certainly raise your score over time.

Hiring a Credit Counseling Agency To Rebuild Credit

Hire a credit counseling agency – these agencies could help you analyze your finances, helping you develop some realistic solutions for your credit and debt issues. Essentially, such an agency will examine your finances and suggest natural areas to cut back and save. Dale Elenteny of Preferred Mortgage Rates explains debt consolidation loans to rebuild credit:

Consider a debt consolidation loan. A debt consolidation loan takes all your outstanding debts on different accounts, combining them into a single payment to be paid monthly.

A debt consolidation loan helps improve your credit utilization rate, and limits missed payments, making it ideal for borrowers with multiple lines of credit struggling to keep up. Your credit points usually drop slightly after applying for debt consolidation. The reason for this is the fact that you are making a hard inquiry on your credit report. But once you get the loan, focus on making timely monthly payments to raise your score.

Ways To Fix Your Credit Fast To Get Approved For a Mortgage

Rebuild credit towards a specific target. Once you start taking steps to rebuild credit, the best thing to do will be to have a specific target so that you aggressively work towards it. Even though a higher credit score is always better, you can also work towards a higher score threshold, as it is also acceptable by many lenders. Here is a breakdown of the FICO scores:

800-850 (exceptional) – this level of credit score would be the best possible scenario as it can get you decent interest rates and the most beneficial offers. Sometimes, such a credit score might get you special individualized perks from lenders.
740-799 (very good) – this level is also pretty decent and will get you various options, especially concerning products and pricing.
670-739 (good) – this is the most common range, and so many Americans are here. These borrowers can secure a wide variety of loans at fair interest rates. Their chances of becoming seriously delinquent are pretty low.
580-669 (fair) – even though borrowers within this range may still secure several loans, they may see higher interest rates and stricter requirements than those within the good; range.
300 -579 (poor) – lenders see borrowers within this range as high risk, meaning securing a loan becomes very hard for them. If they happen to secure a loan, they may need to pay a fee or deposit in exchange. So, if you are in this category, you need to place a credit rebuilding plan immediately.

The Importance to Rebuild Credit To Get Higher Credit Scores

As we conclude, we all agree that rebuilding your credit is necessary if you’re looking to secure a mortgage. So, whether you have a poor credit history or want to improve your credit score, taking the right steps will help you get approved for any loan you need.

So, you need to check your credit reports carefully to see if there are any errors. If you find errors, the credit reports include clear instructions on reporting them to fix them. Once notified of any potential errors, the credit bureau must investigate and report their findings back to you. If the error does exist, it will be rectified, increasing your credit score.

By taking the steps, as we discussed in this article, you can be guaranteed that you are on your way to owning your dream home. Remember, improving your credit score takes time, patience, and persistence, but the result will be worthwhile. If you want to buy a house with bad credit and need help rebuild credit, please get in touch with us at Preferred Mortgage Rates at 866-90-RATES. Text us for a faster response. Or email us at rates@gustancho.com. The team at Preferred Mortgage Rates is available seven days a week to help rebuild credit for borrowers at no cost.