For most people, it’s hard to keep up with the rapid changes that are taking place in our economy right now. I keep the news on while I’m working, because it’s my job to stay informed — and I still have trouble following all of the developments.
But there’s one thing I do know about this economic crisis, and it will affect all of us in the coming months and years. Here it is…
In the post-crisis economy, you will need a better credit score to get financing.
This includes any kind of financing you can think of, from student loans to car loans. And it goes double for mortgage loans. This trend was starting even before the financial stuff hit the fan. Back in May, for example, I was watching Jean Chatzky talking about credit scores on TV (she’s the financial editor for The Today Show). According to her data, home buyers in May of 2006 needed a credit score of 620 or higher to qualify for the best rates on a mortgage loan. Just two years later, in May of 2008, you would have needed a 750 or higher to qualify for those same rates.
As we all know, things have gotten even tougher since this program aired.
Here’s another example to reinforce my point. A couple of weeks ago, I received an email from a staffer with the NBC Nightly News. She contacted me through the Home Buying Institute website that I publish, because she wanted my help getting people to interview for an upcoming show. The theme of the show was about people who were having trouble qualifying for mortgage loans, even though they had good credit scores.
Do you see the pattern here?
Sure, much of this will “blow over” when our economy starts to recover. But I can practically guarantee that we’ll see some new legislation about giving loans to people with bad credit (subprime loans). Some new laws have already been passed to this effect. On top of that, financial institutions are going to be in “survival mode” for a long time to come — those that haven’t collapsed already. So the last thing they want to do is give out loans to risky borrowers.
Now consider the fact that millions of Americans have bad credit scores, and you can see where I’m going with this blog post. From a real estate standpoint, a lot of folks are going to be left out in the cold in 2009.
Start Improving Your Credit Score Now
If you are one of those people with bad credit, and you would like to buy a home in the near future, you need to focus your energy on boosting your credit score. It’s not as hard as you think, and you don’t have to pay some “credit repair” company to do it for you. Here’s a plan of attack for you:
Start by requesting copies of all three credit reports from Experian, TransUnion and Equifax. Review them for errors, such as accounts that aren’t yours. These errors can drag your credit score down.
Start reducing some of your debt, starting with those high-interest credit cards. It’s a good idea to keep you oldest credit accounts open though. If you close your oldest account, you will actually shorten your credit history, which could lower your overall score.
Pay all of your bills on time! A history of missed payments can kill a credit score. Pay at least the minimum balance due on all of your bills. If you want to reduce your credit card debt, you’ll have to pay more than the minimum due each month.
Citation Note: The original version of this article was written by Brandon Cornett. Brandon is the publisher of the Home Buying Institute, which includes one of the largest libraries of mortgage advice for home buyers.