While most home loan applicants know a good credit score is a key element for a loan approval, not everyone realizes raising your credit score by even a few points can make the difference between qualifying for a home loan or not. In addition, it makes a difference to a lower interest rate and a smaller deposit, if you are able to boost your credit score into the next level.
“A borrower with a credit score of 702 will pay a one-fourth-percent higher interest rate than someone with a credit score of 720, even though those are both good credit scores,” said Adv Randolph Samuel, CEO of Consumer Foundation of SA, a consumer rights education NGO.
Home loan applicants with severe credit challenges may need three to six months or longer to improve their credit score, but those who are looking for a smaller boost can work with a credit rehabilitation company and take steps for a faster score increase.
Adv Samuel said all consumers should check their credit score with all credit bureaus a minimum of three months before applying for a home loan, although checking 12 to 24 months before applying would be better. Consumers should check their credit report and credit score at least annually to look for errors and address any negative information.
“A credit rehabilitation company like LUCID can work with a borrower to figure out what they can do that will have the fastest impact on their credit score,” said Adv Kate Thambiran, CEO of LUCID Living, the only credit rehabilitation company in South Africa. “The impact depends on your individual credit report. Some people have a perfect payment record but a lot of debt, while others have blacklistings that need to be dealt with.”
Some of the steps that can be taken to improve your credit score may seem counter-intuitive, such as keeping accounts open if you don’t intend to use them, Adv. Samuel said.
“While it may make sense from a financial point of view to close two older credit card accounts and keep two new ones with lower interest rates, closing a credit card account will automatically lower your credit score,” Adv. Samuel said.
Adv Thambiran, said that while there are certain rules to follow to improve your credit score, some situations can be tricky to navigate.
“If you have repaid an account, for which a judgment was taken against you, you may think that the judgment will be cleared from your credit report, that is not the case.
Paying the debt, does not clear the judgment. The judgment will remain on your credit report for a number of years, unless its rescinded,” Adv. Thambiran said. “Rescinding a judgment and removing it from your credit report can add between 30-40 points to your credit score.
Adv. Samuel said borrowers with credit card debt should keep their balance on each card to 25 percent of the credit limit, but other lenders say 30 percent is acceptable.
“If you can pay down a credit card to under 30 percent of the limit or at least redistribute your debt by transferring a balance from one account to another so that each balance is less than 30 percent of the limit, you can improve your credit score by 20 or sometimes even 40 points,” Adv. Thambiran said. “Of course, that depends on what else is on the credit report.”
“Some people’s credit scores have been damaged when their credit card company reduces their credit limit,” Adv. Samuel said. “While it may not always work, you can call your credit card company to see if they will restore your limit so that it doesn’t look as if you have maxed out your card.”
If you have disputed claims on your credit report, you will need to resolve those issues before a home loan can be approved, Adv. Thambiran said.
“Removing a dispute won’t necessarily send your credit score up,” Adv. Thambiran said. “In fact, it could even lower your credit score. But until it’s resolved, we don’t really know what your true credit score is.”
Some loan applicants have a problem that shouldn’t be one: a lack of credit history.
“It’s a Catch-22 that you need a credit history in order to get a loan,” Adv. Samuel said. “You need to open a credit card and use it and then pay it back on time in order to build a credit history. You need to use it for one or two months to show a repayment history.”
Adv. Thambiran said applicants without credit card debt can improve their credit score if they use a dormant credit card to charge something and then repay it.
Making long-term changes in your financial habits will do the most to improve your credit score, but for a short-term fix, borrowers should consult with a responsible credit rehabilitation company who can make specific suggestions tailored to the individual’s needs.
by Tristan Powys | Credit Counselor | Lucid Living