Credit Building for Buying a Home
There are many articles out there about credit and how to build it. But why does it matter? Why do you or I need to worry about building credit? And what is it in the first place? The following is a brief introduction to credit and how to build it. It is not meant to be a complete or comprehensive lesson on credit and credit scores, just a brief introduction. For more information, talk to your real estate agent or a loan officer at any bank or credit union as they will know, in detail, what will help you.
What is credit?
It is first important to ask the question, ‘what is credit’ before trying to figure out how to raise your credit. So what is it? Simply put, your credit is a way for the banks to judge how responsible you are with money. It is similar to a report card. If you weren’t responsible in your studies, you got a low score, the same goes with money. If you aren’t responsible with your money, the banks will be less trusting in the future.
Why do I need good credit?
Your credit score is used for a lot of things. Banks will usually use it as a way to judge whether or not to give you a loan. If your credit score is low then lending you money may be a bigger risk for them and they may not want to lend to you. Once you are approved for a loan, however, good credit can help to get you a better interest rate on said loan. The interest rate is how much the bank charges for you to use the money they lend you. If you have good credit, they will charge you less.
Good credit can also get you a lower down payment on a loan. Down payments are usually requested by the loaning party from the person taking out the loan. This is to be used as collateral in case the person taking out the loan defaults on the loan. The down payment is usually 10 or 20 percent of the cost of the object. So, if you are applying for a loan for an item that costs $100 and your down payment is 10% you will pay $10 upfront and then your loan will be for the remaining $90. So, if your credit score is higher, the bank may require a smaller down payment.
On a different note, some jobs can depend on whether or not you have a good credit score. If you want to work at a bank, or really anywhere that deals with large amounts of money or financial services, you will need a good credit score.
How is my credit score compiled?
The way that your credit score is calculated varies from company to company, but usually, they take into account things like how you use your credit cards. When they calculate it they also check to see your payments on loans, utilities, and the like and whether they were paid on time.
How does credit relate to buying a home?
As stated above, to get a loan, you need good credit and even though it has a different name a mortgage is a loan. Sometimes it is called a home loan. If you have a low credit score you will probably only be approved for a small and inexpensive home; if it is too low you may not be approved at all for the loan.
However, if you have a high credit score, you can be approved for much more and you may also be able to get a better interest rate on your mortgage. The interest rate on your mortgage will be charged to you every year, so it’s best to get as low of an interest rate as possible.
How can I improve my credit?
Improving your credit score is not a tricky thing. You just need to show the bank that you are responsible with money. The first thing to do is to get a credit card. Now, for some of you that is a scary thought, but, credit cards aren’t inherently bad, the misuse of them is bad. So, you need to go to a bank or credit union and apply for a credit card, then—here comes the tricky part—use your credit card. Don’t over use them, however. It is best to treat it like a debit card. Pretend that whatever you have in your checking account is your limit on your credit card. Then only spend that much and pay it right off as soon as you can. This alone will do wonders for your credit score.
The next thing you need to do is pay everything you can on time. If you do spend more than you can pay back, pay it off as soon as you can next month. It will not diminish your credit score unless you don’t make the minimum payment at least.
you have been using your credit card responsibly for some time, you may talk to your bank about getting your limit raised. Getting your limit raised is a surefire sign to lenders that you can be trusted with money. You should still not charge more than you can pay off to your credit card, however. Just because the funds are there, doesn’t mean you should use them.
If you have some credit, but not enough to get a home loan, try getting smaller loans first. These can be for cars, furniture, or something from a department store. (Most department stores offer some sort of credit card that they will offer to just about everyone).
What if I have no credit?
When you are starting out and have little or no credit history, there are several things you can do to give yourself a leg up. The first thing to do is to apply for a credit card. Go to the credit union or bank and apply—you never know, they may give you one. But, if that doesn’t work, try getting a card at a department store.
If those are not an option for you, talk to your credit union or bank about getting a secured credit card. These are easy to get. All you do is deposit a predetermined amount of money into the bank which they use as collateral and then they will loan you money up to the amount you deposited. You need to still pay it back when you borrow it—it isn’t a prepaid card. Talk to your banking establishment for more details as they may have different rules and operating costs.
Another option is to get a small loan for a computer or other expensive item from a store. Simple loans like these are more like payment plans, but they can help to boost your credit.
How long will it take to improve my credit?
Improving your credit can take time. Patience is needed. A good amount of time to wait is at least 6 months to a year. After that amount of time, the work you have put it should be reflected in your credit score.
If you have little or no credit and you want to buy a home, do not despair—there are ways to improve. Follow these guidelines and talk to a loan officer you trust for more information and you will be on your way to homeownership in no time at all.