Your credit – knowing your score, ensuring credit reports are correct, and acting to improve your score – is among the most confusing topics relating to personal finance. Yet it’s extremely important – particularly if you’re planning to buy a house, and especially if you’re a first-time buyer. Your credit score is one of the first things a lender will look at when you make application for a mortgage.
To cut through all that confusion, here are five tips you can act on right now to identify and address any problems with your credit:
- Check your credit reports for free once a year through the three credit bureaus: Equifax, Experian, and TransUnion. Why all three? Because the information in each of the three bureaus’ reports can differ. If one or all of the reports include mistakes, your credit score may be negatively affected, and you may need to address the errors before going house shopping.
- Be strategic with credit card use. The percentage of your credit limit that you use every month can affect your score. Make sure your balance doesn’t come too close to your limit.
- The simplest and most important tip? Pay off your balance each month. To maintain a healthy score, pay off the balance before the due date. Anything after 30 days post due date can spell very bad news for your score.
- Be consistent. Good credit behavior over the long term will keep your score high.
- Don’t take on more credit. If you apply for several different credit cards, you’re sending a message that you may have maxed out your other accounts.
There’s always the bank of “my home”-the equity you’ve built up in your home over the years.
Equity is the difference between what the property is worth and what you owe on it; the amount you’ll be able to borrow on the property is based on how much equity you have in it.
You have many borrowing options, but each has its upsides and downsides. Consider the following:
Home equity loan
If you borrow through a home equity loan, you keep your existing first mortgage and use the equity you’ve built up as security for a second mortgage. The loan will be paid as a lump sum with a fixed, but generally higher, interest rate, and qualifying for a home equity loan may be more challenging. However, there are tax advantages to borrowing this way; as with deductions for first mortgage interest, the IRS typically allows a deduction for interest paid on a home equity loan.
Line of credit
A line of credit usually carries a variable rate. Typically, you don’t have to take it as a lump sum, so you’re only paying interest on the money you’re using; a zero balance means that you are paying zero interest. Some lenders, however, may have minimum withdrawal requirements, meaning you may have to take a minimum initial amount or a minimum amount each time you use your credit line.
Here, you replace your existing mortgage with another – and put money in your pocket. If your existing mortgage has a higher rate and/or payment than your proposed mortgage, you’re ahead. In any case, the interest rate is usually lower than on a home equity loan. The downside: You’re borrowing the cash portion of the mortgage for the entire term – unless you pay it off ahead of time.