You might look in the mirror now and then and think to yourself, "Gee, I don't look too bad at all." But even if you're really impressed with what you see, even if you're sporting the latest fashions, expensive shoes and a slick haircut, even if you smell really good. potential lenders might be holding their noses at the very thought of you.
If you're planning to buy a home or refinance your home or buy a car or take on many other kinds of debt in the near future, this is a big deal. When interest rates are still near record lows, why should you take on a mortgage at 8% or 9% when there are 6% deals available to those with good credit?
The bad news is that for tens of millions of Americans, their credit stinks -- or at least is substantially suboptimal. The good news is that if you're in that group, you can improve your credit score.
The most basic way to improve your credit rating is to deserve a better credit rating -- by earning it. Pay your bills on time. The longer you do so, the better your score will likely be. Missing or delaying payments often results in big black marks on your credit report -- ones that take a while to disappear -- and by "a while," I mean many years.
If you just can't get payments under control, you may need to see a credit counseling agency. This industry has a mixed record -- so learn about it before jumping in. Check out Dayana Yochim's article "Credit Counseling Crisis" and this discussion on our Consumer Credit / Credit Cards discussion board.
Wisdom from the boards
Speaking of that, you need look no further for great advice on how to improve your credit record than our Consumer Credit / Credit Cards discussion board. It's one of our best boards, featuring nearly 200,000 posts made since early 1997. (And you can read any of them -- we maintain a full archive. Our Fool Community sports hundreds of discussion boards -- try them all for free for 30 days -- where you'll find thousands of people asking and answering questions, sharing experiences and advice, and even amusing each other.)
The credit card discussion board is where I stumbled upon this terrific post by Mark0Young. Permit me to quote liberally from the post, as Mark offers some things you (and your spouse, if you've got one) might do now, even if you plan to borrow several years from now:
- "Make absolutely sure that you make at least the minimum payments by the due dates on all your financial obligations.
- "If there are collections accounts, [make sure] that they get paid off (or disputed successfully) before you apply for a mortgage.
- "Check your credit reports from all three credit reporting agencies. If there are errors, they can take several months to get straightened out if the source of erroneous information keeps on reporting the same error. [You can get copies of your report from all three agencies in one shot in our Credit Center -- check it out.]
- "Use caution [when] picking up any new financial obligations.
- "If you have had one or two cards for a few years, try to keep those cards -- a long-term history with a trade line (credit card issuer, line of credit, etc.) helps the credit score. (I am not saying to keep all the long-term cards, but try to keep at least one, if feasible.)
- "In the decision to pay down debt vs. save for down payment, over on the Buying or Selling a Home board the mortgage lenders tend to recommend paying down debt, but still recommend having a 'cash reserve' to cover at least 2 (or 3) mortgage payments.
- "Be sure to save your W-2 statements (if you are an employee) or federal tax returns (if self-employed or if a substantial amount of your income comes from non-W-2 sources). Generally, mortgage underwriters want to see evidence of a couple years of steady income, and tend to be more skeptical of self-employment income. (You should be saving W-2's and federal tax returns anyway, going back at least 3 years, in case you are audited by the IRS.)"
Three to six months before you buy.
Mark went on to suggest that about six months before you expect to get a mortgage, you check your credit reports again. This is an excellent idea, since the stakes are so high when getting a mortgage. Small differences in the interest rate you qualify for will translate to big differences in your monthly mortgage payments and the overall cost to you of your home. Your credit report might have been clean 10 months ago, but a new error might have been added to it three months ago. Fail to find and fix it and you'll likely pay for it.
The checklist continues (yes, preparing to buy a home can be a tedious process, though most homeowners would probably say it's worth it). Roughly three months before you expect to start home-hunting and talking to mortgage lenders, here are some things to do, per Mark:
- "Start saving pay stubs, bank statements, brokerage statements, credit card statements -- anything and everything that shows your assets, your income, your retirement accounts, your debts, your financial commitments.
- "If you transfer major funds between accounts, keep track of the evidence of the transfers (e.g., being able to match a withdrawal from one account with a deposit to another account).
- "If there is a sudden substantial increase of assets, have records of why the sudden increase. For example, if you sell a major item, keep a record that the deposit is from the sale of that item. (If you sell a car, maybe keep a photocopy of the information you submit to the DMV about the transfer.)
- "If you receive a substantial cash gift, ask the giver for a 'gift letter' that includes: who the money is from, who the money is for, a statement that the money is a gift, and a statement that the money is not expected to be paid back. The reason for #2-4 is that the lenders want to know that you haven't taken on an undeclared loan."
This isn't even all of the post. Mark goes on in even more detail to tell us what we might do a month before applying for a mortgage and when we apply for the mortgage. Click into the board to read his full post -- and comments from other Fools, as well.
Learn more at MyFICO.com, where they have some important information on credit scores. You'll also get great tips in our Credit Center, and on our Buying or Selling a Home and Consumer Credit / Credit Cards discussion boards. Our Buying or Selling a Home board is frequented by several mortgage brokers and lenders, so you can get some info (admittedly not unbiased) directly from some horses' mouths.
Selena Maranjian felt smug about her credit score until she saw her parents' scores. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.