The housing market looks to be improving thanks to recent increases in activity and prices. Although buyers don't like seeing higher prices, the uptick is allowing more homeowners to get out from underwater and sell. The National Association of Realtors' monthly report shows housing sales in October were up almost 11 percent compared with last year.
If you are in the market for a home, your first goal should be to get your credit in order. Here's some advice on how to get started.
1. Get credit utilization down
One major factor impacting your credit score is your credit card utilization rate. This is the percentage of credit debt you have compared to your total available credit. A good rule is to keep your utilization rate to less than 30 percent. If you have any extra cash pay off your balances or at least pay them down before they are reported to the bureaus and before you apply for a mortgage.
2. Don't open extra lines of credit
If you are applying for a mortgage in the next six months to a year, it is best not to open any new lines of credit. Every time you apply for a new credit card, auto loan or other credit product a hard inquiry is placed on your credit report, lowering your score. Applying for multiple lines of credit makes lenders think you're in financial trouble. You want them to know you have your finances in order and can manage new debt.
3. Check your credit report for errors
It's not uncommon for errors to occur on your credit report. A study by the Policy and Economic Research Council found errors in 19 percent of credit reports they examined. Most of the time the errors were from outdated information, mistaken or fraudulent accounts and incorrect account details. Fixing up your errors could raise your score, but you need time to go through the process. So check your reports and clear up any errors six to 12 months before shopping for a mortgage.
4. Keep old accounts open and in good standing
Another significant part of your credit score is your credit history. Typically, the longer your credit history, the higher your credit score. Many consumers assume closing accounts they're not using makes them look better to lenders, but it can have the opposite effect. It's a good idea to keep an older card open to help retain a long credit history. It's also important to keep your accounts active month-to-month. Some credit card issuers will stop reporting your account to the credit bureaus after a long period of inactivity.
It might seem like a lot to do to get your credit in order, but the work will pay off. Following these steps could increase your credit score. The higher your score, the better chance of getting a good interest rate on your mortgage and the more money you'll save over the life of your loan.
Ken is the founder and CEO of CreditKarma.com a free credit management website that helps more than 9 million people access their credit score for free