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How to Build a Good Credit Score

If you need a loan to buy a house, having a good credit score, specifically a FICO score, is essential. And you can manage this score effectively.


A credit score is, simply put, a simplified calculation of your history of repaying debt and making loan payments on time. When you borrow money to buy a house, lenders want to know the likelihood of you repaying the loan on time. Your credit score is an easy way to estimate this probability.


Now, let's understand this important credit score and learn how to optimize it.



Check Your Credit Report

In the U.S., there are three major credit reporting agencies (Experian, Equifax, TransUnion), each issuing its own credit score and report. These reports provide detailed records used to determine your credit score. While the scores from each agency are generally similar, they draw information from different sources. For example, Experian considers timely rent payments, while TransUnion holds detailed information about past employers.


To check these scores and reports, you can get a free report from each credit reporting agency annually through AnnualCreditReport.com. However, these reports do not include your credit score, so you will need to pay a small fee to each company to get it.


Alternatively, some credit card companies offer free access to your score and report. For example, Discover and Capital One provide this service for free. Once you have your report, carefully review the "Adverse Accounts" section, particularly for any overdue accounts or other mistakes.


Assess Your Current Status

Assessing your current status is simple: the better your credit history, the higher your score, and the more opportunities you will have to get a home loan. The Federal Housing Administration (FHA) requires a minimum credit score of 580, while major lenders typically require a minimum score of 620. If your credit report is not satisfactory, it’s time to improve your score. Here’s how.


Fixing Score Drops Due to Errors

A 2013 study by the Federal Trade Commission (FTC) found that 5% of credit reports contain errors that result in lower credit scores. If you find errors, follow the FTC guidelines and provide as much documentation as possible to the credit reporting agency to dispute the error. You should also contact the institution that provided the incorrect information (such as a bank or healthcare provider) to update the information. This process can take time and require documentation, but once incorrect information is removed, your score will improve. This can be a complex process, but mortgage brokers or CPAs you work with can assist with it.



Removing One-Time Mistakes

Have you been late on payments before? Most companies will remove such records for one or two mistakes. According to Forrest, “If late payments are recorded for one or two mistakes, most companies will instruct the reporting department to remove them from the credit report.” This may not help with frequent late payments, but it’s an easy way to improve your score for minor mistakes or accidents.



Increasing Credit Limits

One simple way to improve your credit score is by paying off debt. However, if this is difficult at the moment, consider asking your credit card company to increase your credit limit. This improves your debt-to-credit ratio.


For example, having $1,000 of credit card debt on a $1,500 limit is bad, but the same $1,000 debt on a $5,000 limit is not as bad. It’s a simple principle: you owe the same amount, but it looks better in relation to your available credit.


Paying on Time

Do you often make late payments? It’s time to change this habit. You have the power to improve your credit score by always paying bills on time. Signing up for automatic payments can ensure you never miss a payment.


Give It Time

Unfortunately, negative items (habitual late or missed payments) can stay on your report for up to seven years. However, changing your habits can significantly impact the “payment history” section, which accounts for 35% of your credit score. Therefore, it’s important to start early to be in the best shape when you’re ready to look for a home.



If you have any additional questions, I strongly recommend consulting with your realtor or mortgage broker.


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