ongrats! If you find yourself coming across this article, there’s a good chance you are on the hunt for buying your very first home. If not, maybe it’s a consideration in the back of your mind. Either way, let us talk about a topic you MUST know more about before considering making that big buy—and that’s your credit score!
We hear about credit all the time, the more so as we grow older in adulthood. But why is credit important? Well, credit represents your financial power as an individual. Credit assesses how well you are able to pay for things after borrowing money under different circumstances. This can include going to school, buying a car, and buying a home.
If you are in the position of potentially buying a home, you may have done a very good job at saving up your own money without needing to borrow any. You might even have no debt. While this may have seemed beneficial for you in the long run, you cannot buy a house without having a decent credit score.
How can I begin to improve my credit score?
Building credit takes time and is a process. You need to build up your credit history. An excellent way to start building on your credit is to apply for a credit card. Credit cards are basically lines of credit that can be used to make purchases. However, you are responsible for paying back that loan amount in the future.
Because it seems like you have free money, it’s easy to overspend on your credit card. Making too many big purchases will result in a larger balance on your credit. This can actually hurt your credit score overall. To ensure the best credit score possible, you should only use around 30% of your overall credit. For example, if your overall credit limit is $1000 you should only be spending somewhere around $300.
Here are some tips to avoid overspending when you have a credit card:
- Think of what you can afford to pay back right now, can I really afford that?
- Track exactly how much you spend on the credit card each time it is used.
- Plan and save money ahead for shopping sprees, use your debit card or another form of your own payment.
Pay your bills on time
Sometimes bills are just too expensive, and we feel overwhelmed. This is why it’s important to manage money in our daily lives as best as we can. Avoiding too many unnecessary purchases, planning our spending activities in advance, and saving up any money are all solid money management tips. Credit agencies check to make sure we are paying our bills on time. Believe it or not, payment history does make up around 35% of our overall credit score. If we are ever late in making a payment, this will continue to show in our credit history, even if it was just one time.
Here are some tips to make sure you get your bills paid on time:
- Make a list of all your bills: There are some bills you are able to pay automatically, and some you aren’t. Find out which bills go along with which and sort them into those two different groups.
- Add all of your payments to a calendar: You can even use an online calendar to add dates in.
- Set up automatic payments: You are able to set recurring payment processes through personal banking applications such as Zelle. This may be a good option for you if you struggle with keeping up with making all of your payments manually.
Consider getting added as an authorized user on someone else’s credit card
Whether it be a family member, friend, or partner, consider adding yourself to someone’s credit. This will allow you to use their credit card if you wish, and be associated with whatever their standing is in credit. If you are interested in pursuing this tip, try and seek someone out you think has a chance of having a good standing in credit. Ultimately, your name will be associated with whoever you decide to add on to and you will get whatever credit boosts they do!
Use a Credit Builder
Credit building apps like Cheese offer an easy credit-building solution to folks. Through the app, you'll take out an installment loan. When you make your repayments, you'll build your credit, but here's the real win: at the end of the term, you get your money back. So if you have the flexibility to deal with some reduced liquidity, a credit builder can be a handy tool.
Credit reports
A credit report contains all information about our credit activity and where we are with loan payments. Credit reports also contain information about the status of our credit accounts. Surprisingly enough, it’s actually quite common to come across errors on credit reports. According to the FTC, 79% of all credit reports contain some error.
It’s important that your credit report is accurate because it determines if you can borrow money, whether or not you can get a job or insurance plan, and even things like renting a place to live. Every 12 months, you have the right to access free copies of your credit report from the three major credit bureaus. These include Experian, Equifax, and TransUnion.
Check over for credit report errors
From time to time, many of us fall victim to some kind of identity theft. Without your permission someone may be using your name, address, social security/bank account number, etc. This could result in fraudulent purchases on your credit cards, phone or electric accounts opened, and more money being stolen through other ways such as tax refunds. If you believe someone could be using your personal information, go to this website to get the personal recovery help you need.
Is there any way to get out of credit scores when buying a house? In general, many people looking to buy a home may have a lot of credit built. While the best option should be to wait until you build up credit on your own, there are a few alternative routes you can take if you are in a desperate state.
You can either get a FHA or VA loan. The FHA loan is only for first-time home buyers, and loans can be given to people with as low as a 3.5% down payment. To get these loans, there are a few areas you will need to be consistent in:
- Employment history.
- Income on tax returns.
- Cash reserves.
If all else fails, you do have the option of seeking out a co-signer. A co-signer is one who would take on the loan amount if something were to happen otherwise. While this is an option that can work out well in many situations, you need to be cautious when considering the idea of finding a co-signer when trying to purchase a house. If you were to run into any financial difficulty at some point, the co-signer could be responsible for taking on massive mortgage payments.
Only make a deal with a co-signer you absolutely know is capable of taking on the home’s finances. If the worst possible situation were to arise in terms of financial difficulties, you don’t want to leave a tremendous burden on a potential loved one.
Take a step back
Yes, searching for homes to buy are some of the most fun and exciting times in our lives. It can also be very stressful and overwhelming. There are things you have to keep in mind and take seriously throughout the process. Like we mentioned, credit is one of those key items.
Credit ultimately shows how well you are able to make back payments on what you owe, and without credit history you won’t have much luck in securing a deal on purchasing a house. Just remember to be patient. There will always be a home that’s perfect for you out there to buy. Take the extra time while you’re building up that credit to save up some more money towards your dream house!
While there are some alternative options, your best bet is to build your own credit when considering purchasing a house. That way, you don’t have to worry about paying back too much money or relying on other people. However, if you find yourself in an extreme situation where your own credit isn’t doable, you do have different options. You can seek out someone who is willing to share their credit or a co-signer who could help with the actual purchase of your home. If you qualify and have good financial standing, you could also get some loans to help you out. Either way, we wish you all the best luck on your house hunting journeys and hope you found some useful tips!
