The COVID-19 pandemic has wreaked havoc on citizen’s financial stability, with many missing mortgage installments and even facing foreclosure. If you are in this unfortunate boat, you may have heard about mortgage refinancing options available from most financial institutions and federal and state organizations.
For those with good credit scores, this is a very viable relief option; on the other hand, if you have a bad credit score, refinancing your home may be a bit more complicated. The good news is that it is certainly not impossible, and you can even boost your credit score in the process.
Do you have a bad credit score?
Your credit score is primarily affected by how good you are at paying your bills. If you pay the full amount of your bills and repayments regularly, then your credit score should be high, or sound. If you default on these payments regularly, your score will be low, or bad.
According to Investopedia, credit scores are composed of five distinct factors, and improving any of these will boost your credit score:
- Payment history (35%)
- Credit usage (30%)
- Age of credit accounts (15%)
- Credit mix (10%)
- New credit inquiries (10%)
Most creditors use the FICO scoring system to calculate credit scores. A terrible credit score will dwell between 300– 500 (with 300 being the lowest), while a good credit score will fall within the 750-850 range (with 850 being the highest). Anything in-between will vary from fair to good in terms of credit scores (Source).
Why is a low credit score terrible for refinancing your mortgage?
Financial institutions use your credit score as well as your credit history to calculate the risk involved with lending you money. Unfortunately, a bad or low credit score, as a result of years of late payments and loan defaults,will not bode well for you.Therefore, a bad credit score will affect the creditors’ choice to refinance your loan in the first place, as you may be too high a risk.
If you manage to find a creditor that will refinance you with a bad credit score, you may face terrible interest rates, which will cost you more money in the end. The image below shows the estimated interest rate for a range of credit scores based on the national average of a $300,000 loan amount over 30 years.
Image Source: My FICO
Refinancing your loan may not be the most lucrative option for you, depending on your situation. You should look at your other options and make a calculated choice based on what will save you more money.
How can you improve or increase your credit score?
Luckily, boosting your credit score is not very difficult, and a few simple steps can head you in the right direction. As a bonus, the results can show within a couple of months, with a significant difference visible in a year. How drastically you will increase your credit score will, however, depend on how bad your score is.
To get started on fixing your credit score, have a look at the tips below.
1. Review your credit scores
This strategy will help you understand what financial behaviors are hurting or improving your credit score. You can pull a copy of your annual credit report,free, once a year through the Annual Credit Report website. Watch out for things that you should avoid, but also for potential errors that may be lowering your credit.Please make a note of the behaviors that are boosting your credit score, and make sure to copy them.
2. Pay those bills
From the FICO credit score breakdown shown above, you can see that payment usage and credit history affect more than 60% of your credit score. If you can improve these, you can significantly increase your credit score.
For example, paying off any loan, such as a student or car loan, will help to fix your credit score, even if you do not have large amounts left to repay on these loans. If you are missing payments due to forgetfulness, try to set electronic reminders or automatic bill payments from your bank account.
3. Aim for less than 30% credit utilization
This issue refers to the portion of your allowable credit on the credit card that you are using at any one time. So if you can have an overdraft of $10 000 on your credit card, you should not be using more than $3,000 per month.
The best way to keep this number low is to make sure to repay your credit card in full every month. Requesting a credit limit increase can also help with this, since it could improve your credit score, as long as your balance does not increase as well.
4. Limit hard credit inquiries
Every time you request a new loan, whether it be a home loan, auto loan, or cash, from an institution you are not currently doing business with, a hard inquiry into your credit score is launched. If you have several hard inquiries per year, institutions can take this as you struggling to cope financially, and it will negatively affect your credit score.
Try to avoid these, by not applying for loans, or applying for loans from your current creditors, while you are trying to increase your credit score.
5. Get your taxes in order
If you are paying your taxes with a credit card or are behind on paying your taxes, it can negatively affect your credit score. The best way to remedy this is to get in touch with a professional tax consultant at Taxes R Us. Our professional consultants can help you get your taxes up to date to help fix your credit score.
If you are facing foreclosure with a bad credit score, know that there are plenty of options available for you. Some of these may be more lucrative than others, and some may even help you increase your credit score.Contact us 844-829-2292