If you fall into the category of “adult living in the United States”, then establishing a good credit score will make many things in your life significantly easier. Whether in the long-term or the short-term, if owning your own home is on your “checklist,” establishing, maintaining or improving your credit score should definitely be on your mind.
What is a good credit score? The credit scale ranges from 300 to 850. A score of 700 or higher is, generally, considered a “good score.” In the scope of home buying, your score is considered for two things- whether you meet the minimum score to qualify for a loan and whether you meet the minimum score to qualify for the lowest interest rates.
For your average loan, having a score of at least 620 is required. For FHA loans, however, have a lower minimum, ranging from 500 to 580.
*The credit scores listed here are the average across the country. Speak with one of our lenders directly to see what type of loan you may qualify for with your current credit score.
HELP! I don’t have any credit
Many students and, even, recent graduates may fall into this category- the one with minimal or no credit. If that’s you, don’t fret! Here are some easy tips to building credit.
First, did you take out any student loans while you were in school? If your answer is yes, then you are on the right track to building credit. Your student loans do affect your credit score. So, start making payments! Continue making those payments on time, each month, in order to improve your score.
Surprisingly enough, taking out a credit card in your name is another way to build credit. Once you have that card (and credit limit) in hand, don’t max it out and, when you do use it, make your monthly payments. Having one or two credit cards, in good standing, will help you positively build your credit score.
If getting your own credit card is a bit too daunting, you can become an authorized user on someone else’s card. As an authorized user, you will have a card and will begin building your credit history. One word of warning- make sure their card is reported to the credit bureau. If it’s not, then you will simply have a card in your name without establishing any credit.
One other way to build credit is by taking out a secured loan. Some banks and credit unions will offer credit-builder loans. These are low-risk loans that are specifically designed to build credit. If you have specific questions about this type of loan, talk to someone from your bank or credit union directly.
Improving your credit
Perhaps one way to start establishing a good credit score is through paying your bills, on time! One of the sure-fire ways to good credit is by making each of those payments on time. Seems easy enough, right? An important thing to keep in mind while actively saving up for a down payment on a home, keep paying those bills on time. Don’t allow your payments to lapse or fall behind. Doing so could seriously damage your credit score and, potentially, ruin your chance of buying your dream home.
Maybe you haven’t been able to make all of your payments on time. Do you forget to make payments on time? Schedule payment reminders! Put them on your phone, computer or desk calendar to help you remember. And if you have been making late payments, get back to ground zero. Pay all your previous bills and get current, as quickly as you can. Once you’re current, stay current. Don’t let your past payment history taint your current payment history. Forge a new trail- one with paid bills and great credit!
Managing multiple credit cards with various balances, regardless of how small, can also be detrimental to your credit score. Very simply, your score takes into consideration the number of lines of credit you have. So, having 10 credit cards, even if you keep small balances, is worse for your score than having one credit card with a higher balance. Moral of the story? Close unnecessary credit cards. Consolidate to one or two that you can use for everything and anything.
While we are on the topic of credit cards, watch your balance! One major factor in your credit score is the amount of credit you have versus how much of that credit you are actually using. The ideal range is 30% or less. Even if you come close to maxing out your card(s) and then pay the balance in full, there are some lenders who will still report your balance to the bureau. So although you are not carrying a balance from month to month, your credit score is still reflecting the fact that you are using more than 30% of your available credit.
It may come without saying, but paying your minimum balance is crucial. Credit cards, student loans, car loans, everything. Ensuring you meet that minimum payment each month will reflect positively on your credit score.
While it is definitely easier said than done, start eliminating your debt! This can be applied to your credit card debt, your car loan or even your student loans. If you’re carrying a low balance on a card you can easily pay off, it may be beneficial to do so. Same can be said with student loans. Making larger payments toward one (or more) of your loans so you can reduce your principal faster will get you on the right track to eliminating your debt.
Building credit is a marathon, not a sprint. Whether you are starting your first year of college, have recently graduated, or have been around the block a few times, it is not too late to build or improve your credit score.
There are some ways you can boost your score, short-term, but it is essential to remember that building a good score starts today! Take control of your score- pay bills on time and manage your debt.
And, if you are in the market for a new home, talk to your lender about what type of mortgage you qualify for. We, here at Total Home Lending, are here to help, regardless of where your score may be sitting.