Maintaining a strong credit score to secure a Home loan

Maintaining a strong credit score to secure a Home loan

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How to Maintain a Strong Credit Score and Secure Your Home Loan

A solid credit score is crucial, as it significantly impacts your ability to secure financing and influences the interest rate you're offered. This is especially true when applying for a home loan. Regularly monitoring your credit report is key to staying informed about your credit status as you can catch issues early and track your progress toward improving your credit, which is particularly important if you're a tenant aspiring to become a homeowner.

Owning a home isn't just about desire; it's also about achieving financial security. Property is a valuable investment, and the "forced saving" that comes from paying off a mortgage makes much more sense than paying rent, which is covering someone else's bond.

But before you can secure a home loan, you need a strong credit score. Here's how you can start building it today:

1. Follow the 50/30/20 Rule

This budgeting strategy, popularized by U.S. Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, suggests dividing your income into three categories: 50% for essential expenses, 20% for financial goals, and 30% for personal spending. Allocate the 20% designated for financial goals into a separate savings account, and consider using it to pay extra into your home loan each month.

2. Pay Your Bills on Time

Payment history accounts for 35% of your credit score, so paying your bills on time is critical. Late payments can significantly harm your credit rating. Consider moving your debit orders to a date that aligns with your payday, such as the 3rd of the month, to avoid any delays due to public holidays.

If you've maxed out your credit cards, start by paying more than the minimum amount due each month. Consistent, on-time payments will greatly improve your credit score.

3. Reduce Your Debt

Your outstanding debt represents 30% of your credit score. Aim to reduce your debt so it amounts to no more than 20-30% of your income. Start by cutting back on non-essential expenses and directing those savings toward paying off your debt.

Focus on clearing one account at a time by making larger payments at the beginning of each month. Once a debt is paid off, celebrate briefly, then move on to the next debt, applying the amount you were paying on the first debt to the second. Continue this process until your total debt is below 30% of your income.

4. Keep Your Old Accounts Open

The age of your credit accounts contributes 15% to your credit score. A long-standing credit account with a history of on-time payments can boost your score. Avoid closing old accounts and opening new ones, as this might signal financial instability to credit rating agencies.

Instead, keep at least one credit card account open, use it occasionally, and pay the full balance each month. This demonstrates responsible credit management and builds a strong credit history.

5. Manage Your Credit Wisely

How you manage your existing loans and debt affects 10% of your credit score. While it's wise to pay off high-interest debt first, maintaining a couple of open credit accounts can show good financial management. Once your debt is under control, consider lowering your credit limits and notifying the credit bureau to update your profile.

If you've settled any judgments against you, ensure they are removed from your credit profile.

6. Be Strategic About New Credit

The number of new credit inquiries you make contributes to 10% of your credit score. Avoid applying for new loans until you're ready to take out a mortgage. When you do start loan shopping, complete your inquiries within a 45-day period, so they are treated as a single loan inquiry. Credit scoring models distinguish between shopping for one loan and seeking multiple new credit lines based on the timing of your inquiries.

Final Thought: Start Now

Improving your credit score takes time, so don't wait. Start implementing these strategies today, and you'll be well on your way to securing a home loan with favourable terms.

Source Property24

Author: Seeff Nottingham Road