When you buy a home, whether it is your first time or your fifth, you will indefinitely need a credit score and a good one at that. The credit score is a vital part of the home buying process, yet there are many people, especially those who are buying their first home, that don't know what it is and why it is important. If this has ever caused you to wonder, then you are in the right place. Today we are going to give you a basic understanding of what a credit score is, why it’s important. Please consider however that this is only a basic lesson. There are more things to know about credit scores that we don’t have the time to explain today. Make sure you talk with a professional such as a lender or a loan officer at a bank for more information.
Credit scores: good and bad
When talking about credit scores the best way to explain it is to think about the way people are graded in a class. Whether you are in a K-12 school or taking higher education classes, you can almost never escape the A to F grading system. In school, students are given a grade that measures their knowledge of the curriculum. Your credit score has a very similar system, however, instead of being graded on your knowledge, you are graded on your performance with your money in the past. You see, credit scores are done on an 800 point scale where the higher the score the better. A “good” credit score is a score that is above 700, in most cases. Depending on the trends at the time your lender may be willing to lower their expectations for good credit.
Why is having a good credit score important for buying a home?
Having a credit score in the “high” range is proof to financial institutions like banks and lenders that you are responsible with your money. When you are responsible with your money it means that you pay back what you borrow on time, you don’t default on any loans or anything like that; or at least it only happens very seldom. Now, to buy a house you are going to need a loan from a bank or some other financial institution (unless you have the cash to buy it outright) and a financial institution will be much more likely to lend money to you if they have some proof that you are going to be responsible for it because you will be more likely to pay it back along with the interest accrued. Now it is important to note that good credit is not just used for buying a house. In fact, you need good credit to buy a car, receive a credit card, and to even get some jobs. So, needless to say, good credit is really a must in our society.
Find your own credit score
To figure out your credit score you will have to get it from one of the 3 main credit reporting agencies in the nation. These three companies collect data on everyone form different banks, credit agencies, and other financial institutions and they calculate your credit score. However, the reason you need to go to them is that they are who the financial institutions go to when they want your credit score. So, you can go to them before trying to buy a house and find out exactly what they are going to tell the bank. The three companies that you can go to are Experian, TransUnion, and Equifax. They all offer everyone one free credit check every year so if you want to find out your credit score you can contact each of them once a year to find out.
When should I check my credit score and how often should I check it?It is best not to check it too often as that may actually damage your credit score. However, what a lot of people do is check it 3 times a year, once at TransUnion, once at Equifax, and once at Experian. This allows you to check it every 4 months without having to pay a dime.
Now, you want to check your credit score often even when you aren’t planning on buying a house or a car or getting a credit card. This is because there can sometimes be errors on your credit score like bills that went unpaid that aren’t yours or loans that were defaulted on by someone with a similar name as you from another state. If you do find errors you can get them changed, you just need to contact the agency and they can guide you on how to do it.
How to boost your credit score
While knowing your credit score is great it doesn’t do you any good unless you can change it. So, we are going to show you a few of the ways you can raise your credit score. There are many different strategies out there, so it is best for you to find out what works best for you before proceeding with any one of them. And remember, talk with a professional like a loan officer or a lender for more specific advice on how to raise your credit score as they will be able to better assist you.
So, for starters, the best thing you can do to boost your credit score is to show that you can be trusted. The best way to do that is to make sure that any existing loans are not past due, meaning that you don’t miss a payment. This includes credit cards too. No matter where the card is from you should always make sure to pay the monthly payments off on time. By neglecting them and letting them get past due you will get a lower credit score. But if you show that you can be responsible with the money you are lent you will get a higher credit score.
If you don’t have a loan or a credit card, then you might consider applying for a credit card from your financial institutions of choice. This will be a good way to start building credit as long as you pay at least the minimum payment every month. However, if you can’t get a credit card, you can always talk to the bank or credit union about getting a secured line of credit. The simple way to explain it is like this: the bank will give you a credit card with a small limit like $1000, but before you start using it you need to pay them $1,000. When you close out that card you usually get that money back, but until then it is used by the bank as a sort of insurance in case you don’t pay your bills.
Once you have that card, secured or not, you will want to buy something every month with it. Now, this isn’t something frivolous or expensive, but rather something that you would normally spend your money on like groceries or gasoline or bills. Then, you pay it off completely next month with the money you would have spent on the items in the first place. This will make it so there is a record of you being responsible for your payments and you won’t be putting yourself in jeopardy to do it.
If you want to use a more advanced and intense version of this pervious idea you can always use your credit card as your debit card. The way this works is when you get your checks you pay your bills, put money in savings, and make all your charitable contributions with your normal debit card. Then, you use your credit card for everything else being sure not to spend more than the remaining balance on the debit card so you don’t go into enough debt that you can’t pay it back within the month.
Now, this is obviously more work intensive than the previous idea, but it will move a lot more money around under your name in a shorter amount of time. However, even though it is effective, we only advise this for people who are very good at tracking their expenses and staying on top of their money.
Another thing that is vital for people who use this strategy is self-control. You have to be able to stop spending once you have reached the limit of your debit card even if you still have more on your credit card you can spend.
Things to avoid when attempting to get a higher credit score
The biggest thing we can tell you in regards to things to avoid when you are trying to get a higher credit score is to not miss payments. Missing payments will do you in faster than anything else. So, be diligent and make those payments. It doesn’t matter if it is on a loan, a utility, or a card— you need to pay your bills.
That’s all the time we have for today, so this, unfortunately, ends our basic lesson on credit scores. Like we said at the beginning, this is only the tip of the iceberg when it comes to learning about credit. If you want to learn more, which we advise you do, call us here at the Hughes Group today to speak with one of our licensed real estate agents. If they can’t answer your questions, they can refer you to one of our trusted lenders or loan officers who are people we have worked with before, know, and trust. And as always, if you want to know anything more about the world of real estate, fee free to call or email us at any time.