Know and manage your credit score
When applying for a mortgage, home equity loan, line of credit, refinance, or any other type of loan, your credit score is the deciding factor. It determines the amount of the loan (credit) that you receive and the interest rate of that loan.
The average credit score in the U.S. is around 678-750, but the average American is also more than $8,000 in debt. While a credit score of 678 won’t keep you from getting a loan, it won’t necessarily guarantee you the best interest rate either. Since the cut-off amount (credit score necessary to obtain the lowest rate) varies from lender to lender, someone with a credit card score of 679 may be able to obtain a low rate from one lender, while another lender may require a score of 720 and above to receive the same rate.
If you are reading this and your credit score is below the national average, don’t panic. It is never too late to begin rebuilding your credit. Simple lifestyle changes such as curbing impulse buys, resisting the temptation to open new and unnecessary lines of credit, (especially store credit, with its notoriously high APRs), and forgoing pricey restaurant meals can add up and become money to use for debt repayment.
According to http://www.FICO.org, “The payoff from a better FICO (credit) score can be big. For example, with a thirty-year fixed mortgage rate of $150,000, you could save approximately $131,000 over the life of the loan, or $365 on each monthly payment by first improving your FICO score from a 550 to a 720.”
Now that you know just how essential improving your credit score is, why not get started today? The following tips can help, and for further situation-specific advice, make an appointment as soon as possible with a financial planning professional.
1. Know Your Credit Score And Make It Work For You:
All U.S. citizens are entitled to a free yearly credit report. Get yours, and study it carefully, searching for any errors that may be holding you back. If you do find a mistake, report it promptly to the credit bureaus.
Mistakes on your credit report, like repaid debt and charge-offs more than seven years old (the length of time that past debt stays on your credit report) can keep you from getting the best rates possible if not corrected.
2. Pay Off Your Old Debt:
This is essential for improving your credit. Delinquent accounts can lower your score by up to 30 percent, so be sure to clear them away as soon as possible.
If you find yourself needing to consolidate debt and you own your own home, obtaining a home equity loan or line of credit may be a viable option for you. A home equity loan is an adjustable (variable) or fixed interest rate loan secured by the equity of your home, and the interest that you pay on it (unlike with a credit card) is usually tax-deductible. Taking out this type of loan can jump-start you towards debt repayment, consolidation, and better loan rates and credit offers in the future.
3. Consider A Refinance or a Second Mortgage:
Another way for homeowners to rebuild their credit is to refinance their mortgage, even if you feel that might not qualify for the most optimal rate because of your current credit score. Refinancing, like a home equity loan, can be a powerful tool in credit rehabilitation.
Refinancing could also lower your interest rate, which could save you money in the future. With the cash-out refinance option, which involves refinancing your home for more than the actual cost, you could end up walking away with extra money that can be used to pay off debt.
If you don’t qualify for a refinance, or if you are planning on selling your property soon, a second mortgage may also be a way to consolidate debt. Also, a second mortgage can also save you money if refinancing would mean taking on a higher interest rate than the terms of your current loan.
4. Credit Counseling:
Anyone with damaged credit and debt should consider credit counseling. Many non-profit agencies are worth checking for more information. Feeling hopeless about your debt and the current financial situation does not have to be an option for anyone, regardless of the circumstances.
Whatever steps you decide to take towards rebuilding your credit, think of them as investments. Your credit score can determine your financial future and is the first thing that prospective lenders see, which is why it is so important—and never too late, too improve yours.
