Options to Improve Credit Scores

Considering options to improve credit scores before getting refinance

One of the critical aspects that any debtor should consider before venturing into any financial deals is to check the status of his credit scores. The credit scores are used as evaluative tools by the lenders to ascertain the credibility of the debtor and based on these scores the rates of the loans of all kinds including the refinance are decided and hence it is crucial for people who are considering the options of refinancing their homes with a to secure a better deal by saving on the amounts to be paid by getting lower interest rates and options to build on equity and hence reach a break even early.

Looking at the above benefits, it makes absolute sense that having a good credit score is one of the most vital steps in opening a dimension, where better deals from a variety of lenders are available. The whole purpose of refinance is done with the sole motive to take advantage of a favorable market situation, but unless you have a good credit score, getting these really good deals will not be easy. A good credit score indicates that you have a credible history of paying your dues on time and your earnings to debt ratio is low, whereas a poor credit score will imply that you are not financially stable and hence are not able to make the payments on time. A poor credit score will turn off a lot of good lenders, who wouldn’t want to risk their funds with you at all, and the ones who would be willing to, will either ask for higher rates of interest and may even prefer to ask for the collateral before giving you the refinance option. Also the idea of risking the collateral gain is not advisable and if you need to pay the higher rates, it will mess up all the advantages, which would malign the whole purpose of refinancing in the first place.

Thus, it is of utmost importance that you try to maintain a good credit score, which will usher in with itself a lot of benefits. Moreover, it is a lot easier to maintain a good credit score as compared to first let it go bad and then try to improve it over time. The following steps will ensure that your credit standing remains good, which will then help you with having the best deals and the lowest interest rates when you apply for refinancing your mortgage.

1. Ensure lower Debt-to-Income ratio

If you can maintain your debt to income ratio at about 20% or below, it will ensure that you gave a good credit score. Historically, it has been observed that most of the mortgage lenders prefer to see an overall debt, which is less than or equal to 20% of your net monthly income. This bifurcation provides a kind of security in the mind of the lender that his money is safe with you since the income rate is much higher than the installment amount. If you are have a ratio which is higher than 20%, you should try to see if you can settle some of your outstanding debts and hence reduce the ratio and thus improve your credit scores.

2. Reducing your outstanding credit balances

The outstanding payments towards the credit cards have an inverse impact on the credit scores. The higher the outstanding payments towards the credit cards, the poorer your credit scores are going to be. Hence you should try and keep the credit card balance as low as possible. If these balances get out of control then you would also be increasing your overall debt and eventually this would lead to a very unfavorable debt-to-income ratio.

3. Paying bills on time

The simplest way to improve credit scores is to ensure that you pay all your bills on time. If you have a good historical record of clearing the bills on time, it will almost immediately show a positive impact on your credit standing, which will also ensure better interest rates for all financial investments.

4. Avoid defaulting credit card payments by paying at least minimum due balances

You should ensure that there are no defaults in credit card payments due on your name. Each time a payment is not made, an adverse impact will be registered on your credit scores. What can be done on the other hand is that if you pay at least the minimum amount due on the card religiously, it won’t be considered to be a defaulted payment and hence the credit scores will remain on the higher side. This would help you to maintain healthier scores and debt to income balances.

5. Controlling your credit

All said and done, the best solution to avoid the poor credit score is to stay away from loans as long as possible. Having many loans often makes it difficult for people to estimate the expenses and budget their finances accordingly. This leads to mismanagement and hence payments may get defaulted which is almost destroys the good credit standings. On the other hand, alternative options to manage the debts like debt consolidation loans and debt management techniques like credit counseling and better financial management should be employed to ensure that you spend less, save more and have a proper understanding of your finances.

The above steps are absolutely necessary to be kept in mind if you are thinking to refinance your home with the purpose of getting advantages of the lower interest rates, because unless you have a good credit rating, no lender would be willing to give you the elusive lower rates of interest and without having that good and lucrative deal, the whole purpose of bagging a refinance option would lose its meaning.

Updated: Jan 7, 2011 10:04