So you’re interested in buying a house, but you think your credit sucks and you’re not ready? Today, we’re going to talk about the five things you can do to improve your credit to help you qualify for a house. And here’s a secret: you might be closer than you think!
- Pay Down Credit Card Debt. Now, I know that’s super simple - okay, pay off my debt, if I could do that, I’d qualify for whatever. That’s true, but it’s how you pay it down. Some people think paying down the largest amounts of money is going to increase the credit score the fastest, and that’s not true. What you actually want to do is look at the limit on the card, what percentage of that limit you’re using, and pay it below 30%. So for example, if you owe $5,000 on a credit card that has a $10,000 limit and then you owe $500 on a card that has a $600 limit, paying down the $500 will actually improve your credit score faster than paying down the $5,000. Seems counterintuitive, but the way they’re measuring it is percentage of use, and you get the biggest bang for your buck in score from simply paying down below 30% of the available credit that’s there.
- Open Other Trade Lines. If you only have a single trade line, this makes it very difficult to get your credit score where you want it to be.
- Age of the Credit Line. Stay tuned for a special hack I like to call the “time machine” at the end. This trick allows you to manipulate the age of your credit lines, giving you a significant advantage in boosting your credit score. What exactly do I mean by the “age of the line”? Well, the longer a credit line has been open, especially if it has a positive payment history, the more it positively impacts your credit score.
- Strategize with Collection Debts. The dreaded collections. If you have a collection debt, especially if it’s an older one like a medical debt or a charged-off account that’s been lingering on your credit report, it’s crucial not to rush into paying it off blindly. Before you take any action, reach out to us so we can assess your unique situation. Depending on various factors, such as the type of debt and its status, paying off old collections could actually harm your credit score. For instance, turning an old charged-off account into a current one by initiating payments can lead to a drop in your score. Let us guide you through the process to ensure that any actions taken benefit rather than harm your credit health.
Manage your Debt-to-Income ratio. When it comes down to debt-to-income ratio, it’s not really about the quantity of debt you have, but the minimum payments that are required to service that debt. That ratio against what your gross income is is how lenders calculate your ability to qualify for a loan. So if you have a desire to qualify for a half-million-dollar house, it’s crucial that we take a close look at your gross income and strategically restructure your debt to ensure your debt-to-income ratio is low enough.
Now, here’s a handy tip: for example, if there are two of you and one has more income and better credit, qualifying for the house you want might be within reach for that person alone. Let’s say it’s a half-million-dollar house. However, if your debt-to-income ratio is too high, consider transferring the loan for a car - let’s say its monthly payments are $500 - into the name of the other party, freeing up $500 a month in purchasing power for that half-million-dollar house. You’ll still have the same car and debt load, but by sharing the debt load within the household, you can restructure your finances to afford the same house without altering the financial dynamics.
Now, for that bonus: How do you build a time machine around trade lines?
This is a trick I use with my kids. Now, it requires you to have a relationship with somebody who likes you enough to do this. But what we did with our kids is at the age of 16, and some of them at 17, we added them to one of our oldest trade lines as an authorized user. This means that they get added on there as having the ability to have a credit card in their own name on our credit line. Those credit lines had large available credit, and they had a long history of being open for about a decade. As soon as we put them on there, this actually helped generate a 16-year-old a credit score that came up at 750 simply by being added to this trade line.
Now, the tips and tricks on this is you’re like, “Man, I don’t want to give my kid a credit card like this.” Don’t give them the card. I never gave any of my kids the cards that revolved around the trade line for them to go run up any debt on it. We simply added them to it. The bureau issued a credit score, and that gave us the ability at the age of 18 for them to be able to buy their own house because they had a credit score, as long as they had a co-signer to deal with the debt-to-income ratio. So that’s your bonus content. If you want to beat time, have a parent, a loved one, somebody with a long-term credit history add you as an authorized user and not give you the card. That is one way you can generate a higher credit score in less than 3 months.
**See Related Article Here: My kid is now in college. How do I avoid paying large tuition fees for housing?
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