Repairing your credit: 6 must-dos for every homebuyer

Making sure you have the best credit score possible

Key takeaways:

  • It’s important to get your credit score as high as you can before applying for a mortgage to get the best terms possible
  • Use credit to improve credit, steadily work on debt repayment, don’t open new lines of credit and stay out of bankruptcy
  • Services such as LifeLock can help prevent credit card fraud, which can hurt your credit immensely for many years

Your credit score is often the main deciding factor for lenders in determining your qualification for a home loan. Without a good credit score, getting a loan can become much more difficult and, in extreme cases, even impossible. Use these tips to get your financial house in order before trying to buy an actual one.

Double-check your credit report

The three main credit-reporting companies (Experian, TransUnion and Equifax) provide one free annual credit report to all US citizens. After getting your free credit report, take a closer look and make sure there are no mistakes or discrepancies. If you do come across a mistake, contact the creditor and appropriate credit bureau immediately. Once you’ve proven that a mistake was made, the error will be corrected for you free of charge within 30 days. Seemingly small errors can add up to make a big difference in your score, so make sure your credit report is fully accurate before applying for a loan.

Prevent credit fraud

According to Nasdaq, 31.8 million US consumers had their credit cards breached in 2014—more than three times the 2013 number. This figure is only bound to rise in the coming years. Make sure there isn't any unauthorized use of your credit. Services such as LifeLock can help monitor your credit, protect against data breaches as well as proactively guard against other forms of identity theft.

Deal with charge-offs

When a creditor gives up on collecting payments from you, a charge-off can appear on your credit report. These can be especially damaging as lenders will not want to loan you money if they suspect that you won’t pay it back. To fix a charge-off, contact the creditor and arrange to pay off the old debt either in regular payments or a lump sum. Once you’ve paid off the debt, submit a written request to the creditor asking them to change the status of the charge-off on your credit report.

Address late payments

Provided that the late payment was an isolated incident and not a frequently occurring problem, you can contact the creditor to discuss the situation and have the late payment removed from your credit report. However, if you’ve had several late payments in the past, dealing with this problem can be a bit more challenging. You’ll likely need to be consistently on time with your payments over the course of several months before creditors take notice. Once you’ve established a corrective pattern, you can contact the creditor to see if they will remove your previous late payments from your credit report. While this isn’t easy, it can certainly be accomplished with a little patience and persistence.

Use credit to improve credit

If used properly, credit cards can be a great tool for fixing your credit. If you have a credit card, make sure you pay off your monthly bills on time, every time. Also, try not to use more than 25-30% of your available credit on any credit card. If you've always made your payments on time, you can ask for a limit increase to help keep your spending within this range. Don’t apply for new lines of credit, as this can make it seem like you’re looking for money you know you can’t pay back. Lastly, don’t close accounts either. Instead, use them to make small purchases that you can comfortably pay back at the end of every billing period.

Avoid bankruptcy

Declaring bankruptcy should only be considered as a last resort. A bankruptcy remains on your credit report for ten years and can lower your credit score by as much as 200 points. Don’t be afraid to haggle or negotiate with creditors to resolve past debts. Most of the time, you’ll be able to come up with a plan that works both for you and the creditor. Bankruptcy, on the contrary, will leave a huge negative mark on your credit report for a decade.

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