How To Re-Establish Credit For Commercial Loans
This guide will cover re-establishing credit to qualify for and get pre-approved commercial loans. Life can be unpredictable and sometimes throw a curveball that can derail your finances. However, someone with a FICO Score of 620 or lower could only qualify for an interest rate of 4.25% and pay $1,476 monthly for the same loan. That’s an extra $252 per month or $90,720 over the life of the loan!
Having good credit can save you money and make homeownership more affordable and attainable for you. Lenders price mortgage rates and down payment requirement based on credit scores.
Whether it’s a job loss, a medical emergency, a divorce, or bankruptcy, a financial setback can hurt your credit score and ability to qualify for a mortgage. Your credit score is a numerical representation of your credit history, indicating your ability to handle your financial responsibilities and debt obligations effectively. In the following paragraphs, we will cover how to re-establish credit and increase your credit scores to qualify and get approved for a mortgage.
How To Re-Establish Credit By Keeping Timely Payment History
Your credit history is recorded on your credit reports, maintained by three major credit bureaus: Equifax, TransUnion, and Experian. A formula is used to calculate your credit score, considering multiple factors from your credit history, such as:
- Your payment history: whether you have paid your bills on time or not
- Your credit utilization: how much available credit are you using
- Your credit age: how long have you had credit accounts
- Your credit mix: what types of credit do you have, such as loans and cards
- Your credit inquiries: how many times you have applied for new credit
How To Re-Establish Credit By Increasing Your FICO Scores
The FICO Score is the most widely utilized scoring model, ranging from 300 to 850. A higher score indicates stronger creditworthiness and greater financial stability. Your credit score matters for your mortgage because it affects your ability to qualify for a home loan and the terms you will be offered. Lenders rely on your credit score to evaluate the probability of you making timely loan repayments.
Benefits of Having Good Credit on Commercial Loans
A favorable credit score opens the door to obtaining a mortgage with advantageous terms, including a lower interest rate. Lower mortgage rates can save you thousands of dollars in interest throughout the loan.
Borrowers with high credit scores can qualify for a higher loan amount. By having more buying power due to having a high credit score, you can qualify to buy a more expensive home or make a smaller down payment.
A higher credit score enables you to put in a lower down payment. A lower down payment can reduce the cash you need upfront to buy a home. Higher credit scores mean lower mortgage insurance premiums. Lower private mortgage insurance can lower your monthly payment if you put less than 20% down. According to the FICOs Loan Savings Calculator, as of November 2021, someone with a FICO Score of 760 or higher could qualify for a 30-year fixed-rate mortgage with an interest rate of 2.75% and pay $1,224 per month for a $300,000 loan.
How to Re-Establish Credit in 4 Easy Steps
Now that you understand a credit score and its significance for your mortgage, let's explore a straightforward four-step approach to re-establishing your credit.
The bureau has 30 days (or 45 days if you send additional information during the investigation) to respond to your dispute and verify or delete the information from your report.
If you find any errors or suspicious information on your reports, such as accounts that don’t belong to you or incorrect balances or dates, you should dispute them with the bureaus as soon as possible. Errors in your reports can lower your score and hurt your chances of getting a mortgage.
Step One: How To Re-Establish Credit By Disputing Errors on Your Credit Report
The first step to re-establishing your credit is to check your credit reports from all three bureaus: Equifax, TransUnion, and Experian. Your credit reports contain information about your details, accounts, payment history, inquiries, public records, and more. You should review them carefully and make sure they are accurate and complete.
To dispute an error on your report, you can send a letter or an online request to the bureau that reported it. To bolster your claim, ensure you include relevant supporting documentation and request a thorough investigation into the error, urging the necessary corrections to be made.
If they delete it, they will also notify the other bureaus so they can update their records as well. Disputing errors in your reports can increase your score and improve your credibility with lenders.
Step Two: Pay Your Bills on Time and Keep Your Balances Low
The second step to re-establishing your credit is to pay your bills on time and keep your balances low. These two factors account for 65% of your FICO Score and are crucial for improving your credit. Paying your bills on time shows lenders that you are responsible and reliable with your debt obligations.
Late payments stick on your credit reports for up to seven years and lower your score significantly. Therefore, pay at least the minimum amount due on all your accounts every month, preferably more if you can afford it. Keeping your balances low shows lenders that you are well-rested and can manage your credit wisely.
Your credit utilization ratio, which represents the portion of your available credit that you are utilizing, should remain below 30%. For instance, if you possess a credit card with a $1,000 limit and currently carry a $300 balance, your credit utilization ratio is 30%. Remember, the lower your ratio, the more favorable its impact on your credit score.
How To Re-Establish Credit By Lowering Your Credit Card Balances
To lower your balances and improve your credit utilization ratio, pay off as much debt as possible and avoid charging more than you can pay monthly. You can ask creditors for a higher credit limit or open a new account only if you don’t increase your spending.
If you have been paying timely on your secured credit cards, you can request the credit card provider for a credit limit increase. Timely payments on secured credit cards for at least six months will normally increase your credit limit without putting additional deposit.
Most credit card holder with timely payments have a good chance of getting an increase of credit limit. Getting a credit limit increase will increase your available credit and lower your ratio, but it may also generate a hard inquiry on your report, temporarily reducing your score. Demonstrating good financial habits and enhancing your credit score can be achieved by consistently paying your bills punctually and maintaining low balances on your accounts.
Step Three: Apply for a Secured Credit Card
The third step to re-establishing your credit is to apply for a credit-builder loan or a secured credit card. These two credit products are designed to help people with limited or poor credit history build or rebuild their credit. A secured credit card is a particular type that necessitates a cash deposit to serve as collateral.
The deposit usually becomes your credit limit and is refunded when you close the account or upgrade to an unsecured card. A secured credit card operates similarly to a standard credit card in making purchases, paying interest, and building a credit history.
However, it typically entails lower fees and has more accessible approval requirements. Having three to five secured credit cards with at least a $500 credit limit is best recommended. As the credit cards age, your credit profile will get stronger, and your credit scores will increase.
How To Re-Establish Credit With a Credit Rebuilder Account
A credit-builder loan is a type of loan that helps you build credit and save money simultaneously. Unlike a traditional loan, where you receive the money upfront and gradually repay it over time, a credit-builder loan works in reverse.
You make fixed monthly payments to the lender, who holds the money in a savings account until the loan is paid off. Then you get access to the money plus any interest earned. Both can help you re-establish your credit by adding positive information to your credit reports.
If you pay on time every month, the card issuer or lender will report your activity to the bureaus and improve your credit history and mix. To apply for a credit-builder loan or a secured credit card, check with your local bank or credit union or look for online options. Compare fees, interest rates, terms, and reporting practices before choosing which product suits your needs and budget.
Step Four: Add Positive Information to Your Credit Reports
Adding positive information to your credit reports is the fourth step to re-establishing your credit. This can help you balance out any negative information that may still be on your reports, such as late payments, collections, or bankruptcy.
You can add positive information to your credit reports in several ways, such as requesting to be an authorized user on someone else’s account as an authorized user.
You can use someone else’s credit cards, such as a family member or a friend, to boost your credit scores and strengthen your credit profile by them adding you as an authorized user. The account activity will be reported to the bureaus under both names so that you can benefit from the positive payment history and credit mix. However, you should ensure that the primary cardholder uses the card responsibly and pays the bill on time every month. Otherwise, it could hurt your score as well. It would be best not to overspend or abuse the privilege, as it could damage your relationship with the cardholder.
Getting A Co-Signer For A Loan Or A Credit Card
You can apply for a loan or a credit card with someone with good credit, such as a family member or a friend. If you fail, the co-signer agrees to share the responsibility for repaying the debt. The account activity will be reported to the bureaus under both names so that you can benefit from the positive payment history and credit mix. John Strange of Lending Network suggests adding yourself to non-traditional credit boosters on all three credit bureaus.
You must ensure you can afford the payments and pay them on time every month. Otherwise, it could hurt your and your co-signer’s score.
You should also be fully aware of the risks involved for the co-signer, as they could be liable for the debt if you default. Using alternative data sources: You can use other types of financial information that are not typically reported to the bureaus, such as rent payments, utility bills, cell phone bills, or streaming services. Some companies allow you to report these payments to the bureaus and add them to your credit reports, which can improve your payment history and credit mix. However, you should ensure you pay these bills on time every month. Otherwise, it could lower your score. You should also check the fees and terms of these services before signing up.
How To Re-Establish Credit and Boost Your Credit Scores Quickly
Re-establishing your credit after a financial setback can be challenging but possible. By following the four steps we’ve mentioned, you can rebuild your credit and improve your chances of getting approved for a mortgage. Re-establishing credit and increasing credit scores takes time.
Remember that re-establishing your credit takes time and patience. You may not see results for now, but if you stick to good financial habits and monitor your progress regularly, you will eventually reach your goals and enjoy the benefits of having good credit.
If you need more guidance or assistance with re-establishing your credit or applying for a mortgage, contact us now at Lending Network, LLC. We are a group of highly experienced and professional mortgage brokers who can help you find the best home loan solution for your needs and budget.
