If you have less than perfect credit, you may be considering getting an FHA loan. While the FHA loan does have flexible underwriting requirements, it does require at least a 580 credit score. In some cases, lenders require a higher score; it just depends on the lender. If you don’t have that 580 credit score or you need a higher score for your particular lender, use the following tips to help you get started.
Pay Your Bills on Time
First, you should pay your bills on time. You can’t build up your credit score with late payments reporting. This could take some time if you have a lot of late payments already. Put your main focus on this step for now so that you get current on your bills. Once you get current, it’s important that you stay that way in order for it to have a positive effect on your credit score.
Decrease Your Debt
A large part of your credit score is made up of your utilization ratio. This is the comparison of your outstanding debt to your credit limit. For example, if you have $1,000 outstanding and your credit limit is $3,000, you have a 33% utilization ratio. You want to aim for a utilization ratio of 20% or less in order for it to have a positive effect on your credit score.
Apply for Secured Credit Cards
If you suffered a bankruptcy or you just don’t have any debt and your credit score is low, you may want to apply for a secured credit card. This card is basically a credit line that is equal to your security deposit. For example, if you have a $400 deposit on the card, then you have a $400 credit line. If you don’t pay your bill on time, your credit card company will use the security deposit to pay the bill. You then won’t have a credit line with this particular credit card.
Apply for Unsecured Credit Cards
When it’s time, you can apply for unsecured credit cards. This is usually a good step after you have the secured card for at least 12 months. In those 12 months, it’s a good idea if you used the credit card often. By used it we mean charged things but then paid the bill off at once. This shows the credit bureaus that you have financial responsibility.
If you do apply for unsecured credit cards, make sure you exercise caution. Don’t go and charge everything that you can at once. Instead, charge only what you normally purchase and then pay the bill off in full. If you do need to use the charge card for a large purchase, do your best to pay as much as possible each month until you pay it off in full.
Don’t Close Your Old Accounts
While it might seem to make sense to close your old accounts as you pay the debts off, it doesn’t work in your best interest. A part of your credit score has to do with your account age. This is the average age of all of your accounts on your credit report. If you close an account, you may lower your average account age, which could damage your credit score.
If you have credit cards that you no longer use, just lock them up, but keep the account open. This way you can take advantage of the lower credit age, but not have the risk of running of debt and ruining your utilization rate.
Luckily, FHA loans don’t require stellar credit scores. While it’s great if you have a high credit score because it lowers your risk of default, it’s not necessary for FHA loans. Work on getting your credit score to at least 580 and then focus on other compensating factors, such as a low debt ratio or stable employment to help reduce your risk of default in the eyes of the lender.