For first time homebuyers looking for a place to call home and novice investors looking to personally finance a deal, the first item on your checklist should be to get your credit in order
Roughly 10 percent of your score is based on what types of credit lines you have open -- and the more diverse your lines of credit, the better. An additional 15 percent is based on how long you've maintained that credit. Consumers who lack a strong credit history or a variety of accounts can raise their scores by opening new card accounts, or by taking out a small loan and repaying it immediately. Make sure you review your credit score regularly to keep tabs on what your score says about you.
Those with too many accounts can raise their score by closing a few, starting with the newest, advises Rick Staszak, a financial consultant with Financial Network Investment Corp. in Pittsburgh. "When bureaus see that someone has cards with three or four different companies, they see that as a risk," he says. "You should limit yourself to one or two cards by consolidating your debt."
Staszak adds that cardholders trying to consolidate should watch their credit limits. Because one-third of your credit score is based on how you keep debt under control, consumers who limit their debt to 30 percent of their credit limit will be rewarded with sweeter scores.
One way to stay under the 30 percent mark is to team up with your spouse, says Izzy Ginzberg, chief executive of Monetized Intellect, a small-business consulting firm in Brooklyn. "Instead of holding joint accounts," he says, "if each partner applies for an account on his or her own, they would both have the ability to transfer the balances between partners." If you're single, you can stay well under your cards' limits by transferring balances among your cards.
Unless building credit history is a must, consumers should hold off on opening new accounts for at least three months before applying for a loan, says Gaurav Gupta, director in consumer lending and payments practice for Novantas, a business consulting firm in New York. Every time consumers apply for a new account, whether a loan or credit card, banks pull their credit score to determine the interest rates they can offer. "If there are multiple inquiries, that can really lower your credit score," says Gupta.
Fortunately, there is a loophole, Gupta says. To give consumers the freedom to shop around for the best rates, credit bureaus provide a 15-day window, starting from the day their first credit score is pulled, when several banks can file credit inquiries while only impacting the score once. Each inquiry made beyond that window will lower the credit score by up to five points, says Gupta, so it's crucial to squeeze rate-shopping into two weeks or less.
The easiest way to lengthen your good credit history is to find a worthy co-signer, Ginzberg says. "If you can find someone who's had good credit for several years, getting added to their account will automatically show that you've had at least one account in good standing for 10 or 15 years," he says. "That will increase the average age of your accounts."
Of course, paying bills on time, keeping debt low, and steadily adding good credit history while shifting accounts around in preparation for applying for a loan or mortgage is crucial to landing the lowest possible interest rates. "Building solid credit history takes time," says Gupta. "The best way to do it is by making a plan and sticking with it."