Just paid off all my years of outstanding debt. Looking to rebuild my credit and buy a new home.What can I do?
About 5 months ago I paid off all of my outstanding debt (credit cards, overdue bills, medical bills, etc...) I now want to purchase a new home. How can I raise my credit score so that I can get a great quote on a mortgage loan?
The Answer : Congratulations on managing to pay off the outstanding debt you owe. Now hopefully, you have a better understanding of the true meaning and importance of credit. To understand how to rebuild your credit, you must first know what makes up your score:
1. Payment history- 35%
2. Total debt owed vs. Available Credit- 30%
3. Length of time establishing credit- 15%
4. Types of credit established- 10%
5. Inquiries and New Accounts- 10%
With the way the current mortgage/lending situation is, buying a house is going to be harder than it has been before. It's going to take more than a credit score to get you in. Factors like time on job, down payment among other things will now be taken into more consideration. But that doesn't mean that you shouldn't improve your credit score. What I'm about to tell you is the best route to go.
Since you're thinking of buying a house, chances are you're going to be required to put a considerable down payment to get a decent mortgage nowadays, so you'll need to start saving up. Also you'll need to start showing that you have some positive accounts reporting on your credit to start raising your score.
It's important not to apply for too much credit, becuase it causes a hard inquiry which lowers your score several points regardless of approval or denial. So the easiest would thing to get approved for would be a secured credit card.It's easier to get than regular cards because you would have to place a deposit that's used as collateral to secure a credit line, for example, you place a deposit of $300, your credit line would be $300. But this can work to your full advantage because since most secured cards are linked to a savings account, you could invest what would be saving up for your down payment towards the house and build credit at the same time.
This is what I mean. You open up a secured card, whatever you're going to save for your down payment, you add to the deposit since it's practically a savings account anyway. The more you add to the depsoit, the higher the limit, the better it looks when it reports on your credit because you're creating a cushion of avaialble credit versus what you owe, which counts as 30% of your score. A good practice of using the card would be to treat it as if it only had a $50 limit on it, even though you should add to the deposit as much as possible to boost the limit as high as you can make it. Keep in mind that the deposit will eventually be your down payment towards your house, or at least a portion of it anyway.
As long as you make small purchases ($20/month), pay them off on time every month to show activity, usually after a year or so, the card either converts to a regular card, or a better card's offered, and most importantly, the deposit isn't needed anymore and it's given back. After it's said and done, you will have rebuilt your credit by custom building a high limit credit card, while saving up for your down payment all at the same time!I posted several links to some secured credit card companies that may work for you
Good Luck!
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