It is essential to understand your credit score and how it may impact your home buying or refinancing process. This way, you can get ahead of any potential problems before applying for a mortgage or continue practicing healthy credit habits. An established credit history tells a story of how you have handled monthly debt obligations in the past and sheds light on what type of borrower you may be.
Follow these helpful and straightforward credit tips on the best way to build credit, no matter if you’re looking to improve your score a few points or maintain the score you have today!
Pay your bills on time and in full (or at least the minimum)
This is a great and easy way to build good credit. Your payment history accounts for about 35% of your credit score, so paying your bills on time shows that you are spending and managing your expenses responsibly and have the appropriate means to incur those monthly expenses. Of course, you should try to pay the bill in full each month. However, if you cannot pay the total amount one month on the due date, try to pay part of the balance or the minimum fee, so you do not accrue penalties or late fees.
- Set up autopay
If you have multiple accounts, bills, or credit cards, it can be challenging to remember when each bill is due. A great way to ensure you are making timely payments is to set up autopay.
Be aware of your credit limits
When you apply for new credit, they will give you a monthly limit on what you can spend or charge to the card, based on your income and past credit report. A general rule of thumb is to spend less than 50% of your limit each month, so you can responsibly balance your monthly income and expenses. For example, if one of your credit cards has a $1,000 limit, you should aim to spend no more than $500 on that card each month.
The balance between how much you owe vs. your credit limit accounts for about 35% of your credit score. Thus, having a credit limit ensures you are only spending what you can afford and helps you manage to spend within your means.
Request an increase in your credit limits
If you are earning more income than when you applied for a credit card or have a strong credit history, you can request to raise your credit limits. Having a higher limit while keeping your balances the same may boost your credit score.
Keep your accounts open (even if they are idle)
Credit typically gets stronger with age. Try to keep your accounts open for a long time, even if you are not consistently using the credit card. Keeping an account open while not actively using the card will not hurt your score.
Don’t apply for new credit during the mortgage process
Applying for new credit, especially during the mortgage process, may negatively affect your score. This is because each time you apply for new credit, there will be a hard credit pull.
If you must apply for new credit during the mortgage process, it is best to discuss it with your loan specialist beforehand.
Mix up your credit
Your credit mix accounts for about 10% of your credit score and highlights the different types of debts you have – credit cards, student loans, auto loans, etc. It’s important to have a healthy credit mix to show you are a reliable and responsible borrower.
Check your credit report annually
You are entitled to one free credit report each year from any of the three major reporting agencies – Equifax, Experian, and TransUnion. Review your credit report for any significant changes or potential mistakes. If you notice any errors, speak with your loan specialist before disputing any errors to determine the best way of going about it.
Become an authorized user on a credit card
If you cannot apply for new credit on your own, another simple way to build credit is to become an authorized user on a family member’s credit card. If you are an authorized user, the account will impact your credit report. Thus, if the family member pays their bills on time and in full each month, it will positively impact your credit score.
Get a department store card
If you are not ready to get a credit card from a bank and cannot become an authorized user, another helpful way to build credit is to apply for a department store card. You may still incur expenses, build credit, and learn good credit habits by managing a department store card.
How Fast Can You Build Credit?
Don’t expect your credit score to change overnight. If you focus on consistently healthy credit habits, your credit score may build and improve faster. Focus on a long-term goal – it may take weeks or even months to see significant changes in your score. Just remember, the key to a successful credit score is consistency and patience!
What Credit Score is Needed to Buy a House?
Although there is no specific score needed to buy a house and get a mortgage, having a good score and healthy credit history may help ensure a smoother financing process. Your credit score is also an important determining factor in your loan amount, interest rate, and terms of the mortgage. Typically, having a higher credit score translates into a lower interest rate and more favorable loan terms, as you may be deemed a less risky borrower.
Summary of Credit Tips
There are plenty of credit score tips and tricks that you can focus on to help build, improve, and maintain your credit score. However, the best way to build strong credit is to practice healthy credit habits consistently. Monitor your monthly spending, pay your bills on time, and be aware of all your open accounts.
If you or someone you know is interested in learning more about credit or would like to speak with a mortgage specialist on how to improve your credit score, contact us today.