Getting serious about purchasing a home for, or finally renting that dream apartment means coming face to face with the number that boils down your financial past and present into one three-digit figure: your credit score.
Unfortunately, most people look at their credit report and score with rising panic because they are already under the gun and hoping to make a home purchase in a short amount of time. If this sounds like you, make 2016 your year to break bad credit habits — including these top five — and learn how to fix your credit to put yourself in the best financial standing to land the home you’ve been dreaming about.
1. Not understanding how credit scoring works Habit to break: Sticking to habits that appear good but could be negatively impacting your credit. Resolution: If you are one to rack up large credit card balances every month but pay them off in full when you receive your bill, you may be avoiding debt, but you’re not necessarily helping your credit utilization ratio — something that makes up 30% of your score. Credit card companies will report your balances at varying times throughout the month, so if you happen to be at the high end of your limit, your ratio is high — despite your intention to pay your bill in a few weeks when it’s due.
2. Looking at only part of your credit picture Habit to break: Checking your score but not monitoring your credit report. Resolution: Order your reports and pay attention to more than just your score. With free credit-scoring apps offering built-in credit alerts, it’s easy to fall into the trap of believing you are fully tuned in to what is going on with your credit. But that’s not necessarily the case. You could think your credit score is on target, for instance, but your credit report could show blemishes or inaccurate information that should be tended to now instead of later. Not to mention, these apps aren’t necessarily showing your FICO score — the most commonly looked-at score for lenders. You’re entitled to one free credit report annually from each of the three credit-reporting agencies. Find more information at AnnualCreditReport.com.
3. Putting your credit on the line for someone else Habit to break: Co-signing on a loan that could drive your credit score into the ground. Resolution: Help others in ways that won’t put your own financial health at risk. Co-signing on a loan might seem like a painless, easy way to lend a hand to a friend or family member in need. But should they make late payments or simply default on the loan altogether, guess who is on the hook? You. Unless you are fully prepared and financially able to take over the payments should the arrangement go awry, don’t co-sign. Help the friend or family member find ways to establish or repair their own credit instead of putting yours on the line.
4. Avoiding credit like the plague Habit to break: Steering clear of establishing credit out of fear you’ll find yourself in over your head. Resolution: Find ways to use credit and establish your credit for future purchases — like a home — in the healthiest manner possible. There’s no shortage of horror stories about how people have found themselves swimming in debt or with unmanageable financial responsibilities after taking on some type of credit. This might make it seem as if avoiding credit altogether is the best option. Unfortunately, in the pursuit of homeownership, no credit can be as tricky a situation as bad credit and will make loan approval much more challenging. Instead of avoiding credit altogether, find responsible ways to establish your credit — such as opening a credit card, using it to make just a few purchases regularly, and paying off the balance in full every month.
5. Not paying careful attention to the fine print Habit to break: Not paying attention to important factors like interest rates and late fees. Resolution: Understand the full ramifications of the potential debt you are taking on before doing so. Many people have the best intentions when they establish a new line of credit. They plan on paying all balances in full and avoiding late payments at all costs. Then life happens and a payment is forgotten, or income drops and one spendy month can’t be paid off entirely. These situations happen to the best of us and make it essential to fully understand all terms of a loan or credit card clearly — before signing on the dotted line. Even if you think your credit habits are spotless, read the fine print. This will ensure you continue to keep your credit in top shape and your debt low.