You’re considering the benefits of buying a new home and want the best possible deal at a rate that you deserve. You know that to get a mortgage at a low interest rate, lenders will be looking at your credit score to determine your eligibility for these lower rates and loans. What you may be wondering is just how to build credit so that your reliability shows up just as well on paper as well as it does in your bank account. Whether you’re looking to bid on a new home or simply establish your credit score, read on for a breakdown of exactly what makes up your credit score, some tips on how to establish credit, and how to boost your credit score so you can confidently pursue your goals!
Credit scores range from 300 to 850 points, and once established you will need to make payments for at least six months before being able to apply for those bigger loans and purchases. One way to begin establishing credit is to apply for a secured credit card, in which you submit a deposit—usually between $300-500—before you start using the card, usually up to the amount that you deposited. These cards often come with annual fees and interest rates, so they are best to use only until you are able to qualify for standard credit cards.
You can also establish a credit history through credit-builder loans, also called “Fresh Start” loans. For individuals either just starting to build credit or working to improve their scores, these loans require that you pay off the full amount of the loan, often in 24 monthly payments, before the loan is released to you. While it is also relatively low-risk to the lender, it can help your score improve immensely.
If you have a spouse, parent, or family member willing to help you establish your credit, you may also want to opt for a co-signed credit card or loan. Although you will want to make sure that all of your on-time payments are being applied to your credit report as well, this option can be a good start for those working to establish credit simply and effectively.
Your Credit Breakdown:
Lenders will look at either your FICO or VantageScore credit scores to determine your eligibility.
While many banks and credit unions will also send you a copy of your FICO score on a regular basis, it is good to know exactly what factors go into making up the score you receive.
Your credit score is broken up into five parts — about 35% of your score comes from previous payments —whether you paid on time or were delinquent, and for how long. About 30% is determined by the amounts currently owed and debt carried over instead of paid after each month. Another 15% takes into account your average credit ‘age,’ or how old your accounts are, and how active those accounts are. Ten percent evaluates how well you handle different types of credit such as revolving or installment debts, and the final ten percent weighs recent attempts to accrue additional credit such as opening new accounts and certain credit score inquiries.
Boosting Your Score:
If you’re asking yourself how to build credit quickly, there are a few different routes that can help you boost your score. While it may take at least six months to begin seeing improvements, restoring credit can be a truly worthwhile process.
One of your biggest credit-builders comes from your ability to faithfully make payments on a monthly basis. Do this not only for credit cards, but also for any other debts or bills you hold. This positive repayment history will begin to outweigh past delinquencies and start building that score back up. If you are unable to pay in full, try to keep a maximum of 30% of your credit balance out at a time.
Second, be sure to keep older credit accounts open even if you no longer need them. If they do not charge annual fees or interest, having older accounts helps to reflect well on your reliability. Also, since this score comes from your accounts’ average ages, try not to open too many new accounts at once.
Third, review your credit reports—check for any errors and follow up on any questions that arise. Don’t be afraid to dispute a score you are not sure you have earned.
Establishing and maintaining good credit will enable you not only to get a credit card with rewards, but will also give you freedom to get a great mortgage loan and build a wealth of memories with friends and family. With a little effort, building good credit can be a rewarding and fulfilling effort.