Is Bad Credit Stopping You From Buying a House?
It happens. You’ve enquired for a credit card (or a personal loan or a mortgage), and the lender has rejected you based on your credit score. Now what do you do?
Find out your credit score.
The first thing I suggest is to go and find out what your credit score is.
By law, you have the right to a free credit report every year. You can look it up through Equifax [link]. It will have your credit history on it, and every lender or proposed lender will have something to report on that history. It’s interesting, although sometimes painful, reading.
Now, you can see where the problems are. One of the primary drivers of your credit score is your payment history.
Pay down your debts.
Your credit score and credit history looks at how long it takes you to pay your bills and if you have any outstanding debts.
So, go through and pay all of your due bills one at a time. Search them out, and make sure you have paid each one.
Pay down your debts, and consolidate your debts (more on that here).
You can get rid of the low hanging fruit. There may be a credit card out there with only a couple hundred dollars on it. Pay that off and get rid of it. If you’ve got a store card, pay that off, and get rid of it.
By getting rid of cards that you rarely use or consolidating them into one, you have a systematic approach to lowering the number of outstanding credit payments you need to make monthly. It’s good housekeeping, and it will undoubtedly help your credit score.
Lower your credit limits.
Most people don’t realise the importance of lowering credit limits.
Once you’ve reduced your outgoings and you’ve got a little bit more control over your finances, by clearing off your debt and paying down your credit cards, it’s time to look at your credit limits and lower them.
Why should you lower your credit limits?
When you’re buying a house, the lender does a sum of your expenses versus what you can afford. A lender will look at your income and the cost of your mortgage. They’ll then add other outgoings to see if you can afford the proposed mortgage with your current lifestyle, including your credit limit.
Now, take note that that’s your limit. Not how much you actually put on credit—it’s what your credit limit is.
Say you walked in, and you have a $10,000 limit on your card, but you have nothing outstanding.
Does the bank care? No.
They calculate the expense based on your limit. The rule of thumb is about 3% per month. So, a $10,000 limit will mean about $300 added to your expenses per month—even if you aren’t paying $300 toward that card! This amount will adversely impact what you can borrow.
Whereas, if someone else has a $500 limit, their expenses calculated off of that will only be $15 a month. So, definitely lower it.
See if you need to clean your credit history.
You might have had a troubled history with credit, but you’ve really improved your financial management and are now in a responsible place with your debt. Even though you’ve changed, there may still be some things on your credit score that you don’t think should be there.
This is where you might think about going to a credit repair agency. A good credit repair agency is unbelievably good. They’re experts and know how to get the adverse events off your credit history.
How can they do that? It’s because credit lenders and banks throw everything onto your credit file. Do they follow the rules and regulations, due process? Not always. People are busy. Bank offices are busy. Law is complex, and the legislation is tricky. The credit score and credit history system is consumer-biased—they want to keep consumers safe from copious amounts of debt.
You can have a credit history cleaned up in very short order, but it’s not cheap.
But adverse credit events are not permanent.
If you have an adverse event on your credit score, it may be about to fall off your history anyway; they don’t stay on there forever. There are time limits for certain types of credit events. So, you may just want to wait.
As credit events fall off of your file, your credit score will change. That’s also why it’s a good idea to keep an eye on your credit score. A reputable credit repair agency will be able to tell you if you really need their services or if your score will soon go up.
When thinking about your credit history and getting a mortgage, remember…
- Find out your credit score—you are entitled to a free check of your credit score at least once a year.
- Pay down your debts—you may have debts that you didn’t even know about. Find them and pay them down.
- Lenders don’t care how much you put on credit; they only look at the limits—sometimes banks increase your credit limits without asking.
- Reduce your credit limits—reduce your credit limits to the minimum that you can.
- Consider a credit repair agency—a reputable agency can do wonders, and they’ll tell you if you don’t need them.
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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
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Who is Paul Atherton, That Wall Street Guy?
An ex-Wall Street advisor who worked with major players in the global financial industry for over 30 years, Paul’s mission is to help regular people reclaim their wealth and financial security.
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