If you’re looking to take out any line of credit such as a mortgage or personal loan your credit score is crucial. It informs whether you will be offered a loan, and if you are, what the repayment terms will be.
If you’re working to boost your credit score, here are three mistakes people often make, thinking they’re improving their score when they actually may be doing more harm than good.
Mistake 1: Stopping All Credit Card Use
You’ve just worked hard to pay off your credit card debt. You keep the account open (because you know closing the account can hurt your credit) but you stop using your credit card altogether. Sounds like a good idea to keep debt to a minimum, right?
Contrary to what you might think, spending money on a credit card is actually a good way to build your credit score because 35% of your credit score is credit history. The key is to use your cards responsibly and demonstrate a pattern of making on-time payments and keeping a low balance.
You can keep your cards active by using them for monthly expenses such as groceries and utilities. Then pay off the credit card balance with the funds you would have used to pay for these expenses.
Mistake 2: Debt Consolidation Timing
In general, we can agree that consolidating your debt is a good idea. Shopping around for better interest rates and bringing everything you owe into one, manageable account is sensible. To make it work for you, though, timing is key.
If you’re consolidating debt it is best to do this 18-24 months before applying for a mortgage. Applying for a mortgage too soon after consolidating debt may skew the numbers if your recent credit history shows the credit checks and new account you acquired to consolidate your loans.
Timing it a long way in advance and keeping up with regular payments shows consistency in making payments and gives you more time to lower your debt to income ratio.
Mistake 3: Applying For Other Credit Accounts
Deciding to apply for a mortgage or personal loan causes people to review their finances as a whole. In theory this is a great idea. However, this scrutiny may lead you to make one of the worst mistakes possible when it comes to improving your credit score.
Applying for new credit accounts can hurt your score for up to one year. It can be tempting for many reasons. Maybe you want to move your money around to consolidate debt. Or now that you’re thinking about buying a home, you’ll need new furniture and appliances. But every time you apply for credit it can have an adverse affect on your credit score and future mortgage approval.
The best thing you can do is plan ahead far enough in advance to get all your finances in order, or wait until after closing to apply for any new accounts.
Please note that we are not a credit repair company. For more information, speak with a credit consultant.
About Michigan Lender, Julie Krumholz
Julie Krumholz is has been helping Michigan homebuyers for over 30 years and has several loan programs available for various incomes and financial situations. She brings a wealth of experience to her clients and nothing makes her happier than seeing the face of a happy and excited customer at the closing table.
If you are looking for a mortgage lender in Michigan, call Julie from Superior National Bank today at: 586-382-5482 and let her help you navigate through the loan process and answer any questions you may have.