Introduction
Owning a home of your own is a dream for many people, however, they forget the importance of a good credit score to achieve this dream. From getting better mortgage rates, and less down payment, to getting favorable loan terms, a strong credit score can open doors to a better loan commitment for first-time home buyers.
The Importance of Credit Building
Why Is Building A Credit Score Important?
Whether you’re buying a home or taking a personal loan, your credit score impacts the terms on which you’ll be getting or not getting the loan in the first place. Every lender looks at the credit history of the loan taker to determine if they’re worth lending to.
From your interest rates to how fast you can avail a loan, everything depends on your credit score, making it important to build an excellent credit score for meeting your short and long-term financial goals.
In summary, here are a few benefits of building a strong credit score:
- Higher credit score leads to faster approval of loans as well as higher approval rates for loans and credit cards alike.
- Higher credit scores help you get lower interest rates on all types of loans, saving you hundreds of thousands of dollars in the long run.
- Whether you’re looking for lower mortgage rates or a credit card with a higher limit, a higher credit score helps you get favorable terms on all types of loans and deals.
Steps To Build Credit
If you’re looking to buy your first home but feel nervous about navigating the labyrinth of credit building, here’s a step-by-step action plan for what you can do to not only become a homeowner with less financial and emotional distress but also use your strong credit to achieve all your big and small dreams.
Take A Look At Your Credit Report
You can’t improve something until you know where you stand. By obtaining a copy of your credit report, you can look for any discrepancies, dispute inaccurate information, and review your credit. To do this, simply visit AnnualCreditReport.com, and request a free credit report.
You can also get a free copy of your credit report from the three credit reporting agencies, or CRAs, namely Equifax, Experian, and TransUnion. Once you’ve obtained the credit report, you can buy your credit score from any of the 3 CRAs mentioned above, or use any credit score service to do so.
Create A Credit History
If you’re new to credit building, there’s no better time than now to start on your credit journey. Whether you’re looking to obtain a loan for your first home, or planning to start a small business, a good credit history goes a long way in helping you achieve your big goals.
You can start by taking out a small loan or even getting a credit card so that you have the opportunity to pay it back and establish a positive credit history. A longer credit history goes a long way in helping you improve your credit score. If you don’t want to do something big, you can just connect your credit card with one of your less expensive subscriptions, such as the payment for your wifi or water bills.
Once they’re paid through the credit card, just set up autopay to add the same amount of money to your credit card, like refilling it. This will improve your credit score while keeping your expenses in check.
Always Pay On Time
Timely payments of credit cards and loans help lenders see your creditworthiness and establish you as a trustworthy borrower. By maintaining a good payment history, you can ensure a significant increase in your credit score over time.
For an easier process, try setting up automatic payments for all your credit cards as well as loans. This will ensure that you never have to worry about missing payments and help you become disciplined and more responsible with your credit score.
Focus On Low Credit Utilization
It may not be as obvious but an unsaid rule of credit building is to live below your means. A good percentage of the usable credit limit is 30%. This means that you should aim to keep your credit card bills below 30% of the total limit of your credit card.
A higher ratio utilization depicts that you’re not a smart spender and can’t be a trusted borrower. Even if you have to spend more than 30% of your credit limit, pay that off as soon as possible, even in full, to avoid any extra charges, and a lower credit score.
Diversify Your Credit Portfolio
Just like your financial portfolio, your credit portfolio also needs diversity in order to be more stable and demonstrate responsible credit management. While having a mix of credit cards, loan installments, and mortgages is desirable, it’s also essential to never take more than you can pay back.
A good credit score involves being able to take and pay back debts on time. This shows lenders that you’re spending responsibly, and have good money management skills, implying that you’re more likely to pay back the mortgage payments on time.
Keep A Check On Your Credit Score
As important as it is to check your credit score before you start building your credit, it’s equally important to keep tabs of how much you’ve improved over time, and how you can further improve your credit score.
You can request any financial institution or even your credit card company to offer you credit monitoring services in order to keep a check on your score. More often than not, these monitoring services come at no cost to you.
Be Consistent
Last but not least is the ability to stay consistent with your credit building practices. A good credit score can only be achieved by following healthy credit hygiene and keeping your debts in check.
By consistently paying off your debts on time, and taking credit responsibly, you’ll be able to not only build a better credit score but also maintain it for achieving your long-term financial goals, such as buying a house, starting your own business, or even saving for your children’s education, and your own retirement.
Some Additional Tips For First-Time Home Buyers
Buying a home for the first time can be an overwhelming process, while credit building is an essential part of home buying, here are a few other tips that you can utilize as a first-time home buyer to make the home-owning process simpler for you:
Start Saving For A Down Payment Early
If your long-term goal is to buy a house, you need to act fast and start saving for it as early as possible. Most banks and financial institutions pay up to 80% of the home loan while the home buyer pays the down payment of 20%.
If you don’t have enough money saved up for the down payment, you may need to pay for Private Mortgage Insurance (PMI), which will also jack up your mortgage payments, and the subsequent interest rates.
Get Pre-Approved For Mortgage
A pre-approved mortgage helps you scout the houses that match the range of the loan. It also shows the lenders and sellers that you’re a serious buyer with a good enough credit history. This can give you a big advantage in the competitive housing market of 2024.
Budget For Closing Costs
Even when you’ve saved enough money for a down payment, you must always budget for other needs such as appraisal fees, attorney fees, as well as title insurance among other closing costs.
These closing costs range anywhere between 2% to 5% of your house purchase price and can add to your mortgage payments if not budgeted for earlier. By saving enough money to cover these costs, you’ll effectively decrease your interest rate on a house mortgage.
Work With A Professional Real Estate Agent
As a first-time home buyer, there’s so much for you to understand and learn. As such, taking the help of an experienced real estate agent will be beneficial to figuring out your needs and preferences, before you start searching for a new home.
They can not only help you understand your real estate requirements better, but also guide you through the process, help you pick the right houses, and even get you better deals. Working with professionals who specialize in first-time home buyers, and understand their requirements might be something you can look into.
It’s A Wrap
Building a strong credit score is all about patience, persistence, and planning. When you plan to become a homeowner, it’s important to take control of your finances in order to build a credit history that’ll help you pay lower interest rates and down payment on your first home. By following the steps mentioned above, not only can you make homeownership a fulfilling and rewarding experience, but also set yourself up for success in the financial arenas of your life in the long run.
