If you are thinking about refinancing, you should consider looking at your credit first. The higher your credit score is, the better rate and terms lenders will be able to give you. The idea is to have a high credit score so that lenders can see that you are a good risk.
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Of course, it helps if you have a low loan-to-value ratio and low debt ratio too, but your credit score is the first thing lenders see about you. Do what you can to make sure that your credit score is high as it can be.
Fix Any Errors
We recommend that you pull your free copy of all three credit reports
here. Then take the time to go through each item reporting on your credit report. Ask yourself the following questions:
- Does each account belong to you?
- Is the information provided true? Look at the account balance and payment information to make sure.
- Is anything reported incorrectly?
- Are any late payments reported true?
If you notice anything is amiss based on the questions above or you see any other issues with the credit report, get in touch with the appropriate credit bureau right away. You should also get in touch with the creditor that is reporting the information to get them to correct the information as well. You will have to provide proof as to why you think the information is inaccurate in order for the credit bureau and/or creditor to look into it.
Bring Your Accounts Current
If you have any accounts that are past due, bring them current as soon as you can. If you have to contact the lender to work out a payment arrangement, do it right away. This way you can work on getting your account back on track as soon as possible.
It’s best if your late payments are at least 12 months behind you when you apply for a refinance, so the quicker you fix those late payments, the better off you will be. Some lenders can excuse one late payment in the last 12 months, but anything more than that and you should plan to wait at least 12 months before you apply for the refinance.
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Keep Your Credit Card Balances Down
Credit utilization is a large part of your credit score. It lets lenders know how much of your available credit you use at one time. The threshold credit bureaus use before it negatively affects your credit score is 30%. If you have more than 30% of your available credit outstanding, it can bring your credit score down.
If you know you have a high balance, start paying it down as soon as possible so that you have time before your refinance to really make a difference on the balance. If you can’t get the balance paid down to 30% of your available credit, consider asking your credit card company for a credit line increase. This will decrease your credit utilization rate and help your credit score increase.
Don’t Apply for New Credit or Close Old Credit
When you know you want to refinance in the near future, keep your credit as status quo as possible. In other words, don’t apply for any new credit. This will bring the average age of your credit down, which can negatively affect your credit score.
You also shouldn’t close any old accounts. Even if you have credit cards you never use anymore, leave them open. Their ‘older age’ can help your credit score. If you close them, you lower the average age of your credit, which can bring your credit score down rather than up where you want it.
These simple tips should help your credit score increase. Now keep in mind that it won’t happen overnight. It could take months for your credit score to react to the changes you’ve made. The key is to be consistent and not give up. Eventually, your credit score will increase and you will have a better chance of getting the low-interest rates and good terms that you want on your mortgage.
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