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Once you have your reports in hand, you can take steps that may have a positive impact on your scores.
Step 1: Check for errors
A credit report gives a comprehensive list of your lines of credit and payment history. The first step is to review your credit report for errors and take steps to make corrections, including past and present names, loan amounts and credit cards in your name.
When checking your credit score, bear in mind that some differences in credit scores across bureaus is normal. But if one of the three credit scores is an extreme outlier, it could be worth double-checking your credit report from that bureau to make sure it doesn't reflect any questionable or erroneous activity.
Step 2: Don't miss a payment
Creditors are interested in seeing how you manage credit, and the consistency of behavior counts. You should always pay at least the minimum amount due on bills on time every month. An easy way to ensure you don't miss a payment is to sign up for automatic bill pay when available.
Step 3: Lower credit utilization levels
Credit utilization is the ratio of a credit card balance to the credit limit. If your balance is $5,000 and your credit limit is $10,000, then your credit utilization for that credit card is 50 percent. In general, good credit utilization is less than 30 percent, so if you have a higher ratio, consider using your tax refund to pay down this debt.
Step 4: Don't close old credit cards
If you have a credit card that is no
longer used but was previously paid off on time each month, don't close the account. Not only is this good for your credit utilization ratio, but it also is another indicator you're a responsible candidate for a loan.
Step 5: Don't apply for new credit
Avoid applying for any new credit, such as an auto loan or a new credit card account, between now and the time you will close on a home purchase. Lenders considering your loan application request your credit score from one or more credit bureaus. And these lender "inquiries" are recorded with one or more of the three national credit bureaus, which may lower your credit score by 10 to 20 points. The score decreases typically only last a few months, as long as you continue to make payments on time. But unless they're absolutely necessary, try to avoid additional inquiries until after you've secured your mortgage.
If you follow these five steps, you may see an increase in your score within a few months so you can get a loan and be an attractive buyer when it comes time to put in a bid for your dream home. Keep in mind, the more you can put toward the down payment, the more instant equity you'll have, the lower your monthly payment will be, and the better your chances are of not needing private mortgage insurance (PMI), which can add hundreds of dollars to your monthly payment. Plus, if you're able to put down more than a lender requires, a mortgage company may be willing to give you a pass on other issues on your application, such as a less-than-stellar credit score.