Everyone knows that credit scores matter for buying a house. And although you can get financing with bad credit, everything is so much easier when you have a good credit score. So if you have borderline credit, it’s time to get busing improving your score. It doesn’t have to take years or even months. There are several things you can do to improve your credit score within a matter of mere weeks. So check out these 6 ways to boost your credit so you can buy a house in Los Angeles.
1. Understand Your Credit Score
The first step in improving your credit to buy a house in Los Angeles is to understand what your credit score is and what it means. That way you’ll be better equipped to go about boosting your credit.
Experts explain: “Your credit score, also called a FICO score, is a three-digit value ranging from 300 to 850. This number indicates how likely you are to repay your debt. This score is based on info in your credit report that comes from the three major credit bureaus: Transunion, Equifax, and Experian.”
A credit score above 670 is typically considered “very good,” but below 600 would be considered “weak.” The higher your score, the better your access to a mortgage with a better rate and terms – which saves you a substantial amount of money in the long run.
Here’s a breakdown of the factors that go into determining your credit score:
- 35% – Payment history
- 30% – Utilization (“amount of credit used divided by the amount available)
- 15% – Length of credit history
- 10% – Credit mix (installment accounts being better than revolving accounts)
- 10% – Number of new credit accounts opened in a short period of time-consuming
2. Pay Down Debt
The first and most effective step you should take in boosting your credit so you can buy a house in Los Angeles is paying down your debt. Reducing your debt will be a major factor in determining whether you get a mortgage to buy a house.
Paying down debt improves your debt-to-income ration – one of the main things lenders look at. “Lenders prefer,” financial pros say, “that your total debt payments take up a relatively small portion of your total monthly income. Eliminating a payment may help you qualify for a loan. Most mortgage lenders require a back-end DTI (the total amount of income allocated toward debt, including your potential mortgage payment) of no more than 43%. So by paying down a credit card balance or paying off your car loan, you will immediately lower your DTI and increase your odds of approval.”
DTI doesn’t actually directly affect credit score, but paying down debt does because it reduces your utilization, which, remember, accounts for30% of your score. “The more of your available credit you borrow against, the more it can negatively affect your score. So again, by reducing how much debt you have to your name, you become a much more attractive borrower.”
3. Check Your Report and Dispute Errors
You also need to check your credit report to see if there are any errors or inaccuracies, and if so, dispute them. Such errors can profoundly negatively impact your credit score.
You can get a free copy of your credit report at annualcreditreport.com, and then go over it with a fine-toothed comb. A report by the FTC “found that one in five consumers had an error on at least one of their credit reports.” Be sure to look for:
- Incorrect name or address
- Credit lines that aren’t yours
- Paid debts that are listed as still outstanding
Disputing and then having such mistakes corrected can immediately boost your credit so you can buy a house in Los Angeles.
4. Increase Your Credit Limit
Another effective credit-boosting tactic to help you buy a house in Los Angeles is simply to increase your credit limit. This can boost your credit score because, although it won’t alter your debt-to-income ratio, it will lower your credit utilization. Your debt stays the same, but your available credit increases, and so your utilization is lower.
Often, all it takes is applying through your credit card company’s website (though sometimes it takes a phone call). Just be aware, though, that if your credit has taken a hit since you opened that credit card account, the company may lower your credit limit instead of increasing it.
5. Get a Credit-Builder Loan
You should also look into getting a credit-builder loan to boost your credit so you can buy a Los Angeles house. Doing so can help you diversify your credit and boost your score a bit.
Here’s how a credit-builder loan works: ““These small loans, which are typically less than $1,000, aren’t really loans at all ― at least not in the traditional sense . . . The financial institution deposits the loan amount into a locked savings account you can’t access, and over the next six to 24 months, you pay off the loan just as you would with any other loan. Once the loan is fully paid off, the accumulated money is returned to you in total.”
And the really good news is that credit-builder loans often don’t require a traditional credit check in order for you to qualify.
6. Use Someone Else’s Credit
You can also piggyback on someone else’s credit to boost your own credit to buy a Los Angeles house. All it takes is asking a family member or friend with good credit to add you as an authorized user on their credit card.
When you do this, the account information is reported on both your and the other person’s credit report. You don’t even have to use the credit card either. This won’t boost your score a lot, but it can help.