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How to Build A Good Credit Score…
…that lenders will love. If you plan to buy a house in the near future, or even in the not-so-near future, establishing and maintaining a good credit score is paramount. Not only is good credit necessary for approval for a mortgage, it also makes it easier for buyers to obtain loans at favorable rates. The mortgage interest rate is the biggest influence on home affordability. Building A good credit score is important not only for a home purchase, but for many life goals.
The more you improve your credit score, the more credit-worthy you are to lenders. You will find that your interest rates are lower when your credit score is higher, on all kinds of credit. Whether it’s credit cards, installment loans, or a mortgage, there are many benefits to a good credit score. Your credit score will make a big difference in your opportunities.
Many job opportunities are potentially affected by your credit score. If you plan any type of career where you are responsible for money, your credit score will matter. Employers may reason to themselves, “if they can’t handle their own finances, how can I expect them to handle the company’s?” Good credit scores are also very important in a job that requires a government clearance.
It can also increase the likelihood of being approved for rental applications or getting a job, as some employers and landlords may check credit history. Additionally, having good credit can provide individuals with more financial opportunities and flexibility, such as being able to qualify for higher credit limits or better insurance rates.
Building a credit-worthy FICO score is not complicated, it just takes a plan and consistency. Here are some great tips:
How to Build a Credit Score That Lenders Will Love
The lending industry has changed a lot over the last decade, and your credit score and credit history are an increasingly important part of home buying. Building a good credit score is one of the first places to start for the first time buyer. There are good practices to building a credit score that will allow you to get the best interest rates, and allow you the greatest amount of choices and buying power.
Lending Standards and Requirements Have Changed
Before 2008, lending standards were looser, compared to today. It used to be that you could get a loan a lot easier, and that is one of the problems that led to the mortgage debacle and the Great Recession. Too many homebuyers got loans that they really could not afford. But lets not digress…
Today it takes a lot more forethought and planning to buy a home. Although the credit score isn’t the only factor in loan qualification, it is a major factor that lenders use to measure a buyer’s creditworthiness.
Understanding Your Credit Score
Understanding how your FICO score works is paramount in managing and building your credit. The Fair Isaac Corporation developed the FICO score, which is a widely used credit scoring model in the United States. FICO uses the three major credit bureaus, Equifax, Experian, and TransUnion, to gather information and calculate credit scores. FICO then analyzes this data from the credit bureaus to generate credit scores for individuals. The information from all three credit bureaus is taken into account to ensure a comprehensive assessment of an individual’s creditworthiness.
Briefly, credit scores range from 300 to 850 and are determined by considering factors like payment history, credit utilization, length of credit history, types of credit used, and new credit applications. The specific percentages of each element that make up a FICO score are not publicly disclosed by the Fair Isaac Corporation. However, the following percentages are what are generally thought to be accurate:
1. Payment History …………..35% Pay your bills on time. This one thing has the most influence on your score. The highest weight is put on the highest payments, mortgage, car payments, etc. Having a long history of paying your bills on time is the top way to improve your credit score.
2. Balances Carried …………..30% Keep your balance to a ratio as low as possible. Outstanding balances should be less than 30% of the available credit. Credit specialists say that having balances under 10% is the best target to aim for. Spread the balances between cards, don’t have all the balance on one card with the others at zero.
3. Credit History ………………15% The longer the credit history the better. Long credit history paid on time has a positive impact on your credit score. So don’t close old accounts, especially if they have a long history. That will shorten the average length of your credit history, and lower your score.
4. Mix Of Accounts ……………10% It is ideal to have a mix of installment and revolving accounts. Mortgage loan, auto loan, 3 to 5 credit cards (more is ok, too), paid on time over 1 to 2 years. You don’t have to have them all at once, however. A mix of credit accounts over the years is ideal.
5. Inquiries ……………………..10% If you are applying for a mortgage, you are allowed a number of credit inquiries for 14 days, after that inquiries can cause you to lose points. Constantly applying for credit will cause a lower score.
Inquiries that don’t hurt the score: Job related, insurance/utilities, account review, personal (www.annualcreditreport.com) and pre-approved offers in the mail.
Depending on the lender, the emphasis on each of these five aspects of your history may be different. Some lending institutions may go further back into your history than others.
Steps to Build a Good Credit Score
There are several steps to build a good credit score. Most of these are common sense, when you understand how credit scores are calculated. Briefly, credit scores range from 300 to 850 and are determined by considering factors like payment history, credit utilization, length of credit history, types of credit used, and new credit applications.
- Get a copy of your credit report and know what your credit score is. In a sense, you have to know where you are on the map before you can plan your journey. You are allowed one free credit report every six months for your own knowledge, which is a good idea to keep aware of what is going on with your credit score. Check your credit report for errors.
- Make sure that your creditors are reporting to the credit bureaus. You want to get all the credit that you deserve by paying your bills on time.
- Look for the areas that need improvement. Of the five categories above, which ones do you need to give more effort to.
- If you have a late payment or two in the last 12 months, you can write what’s called a
- Limit your debt. The debt-to-income ratio is one important metric that lenders will use. The usual debt-to-income ratio that FHA loans will allow is 43%. This means that your total monthly debt payments, including your mortgage, should not exceed 43% of your gross monthly income. However, some lenders may have their own overlays and may require a lower debt-to-income ratio. The usual debt-to-income ratio that conventional loans allow is typically around 36%. However, this can vary depending on the lender and other factors. It’s always best to check with your specific lender to determine their requirements.
- If you don’t have very much credit yet, there are smart ways to build credit, and there are not-so-smart ways. Starting out with a credit card is usually the first step. You can get a secured credit card, which requires a cash deposit as collateral, which acts as your credit limit. This helps you establish credit history and build a positive credit score.
- Additionally, some banks offer credit cards specifically designed for individuals with no credit history, such as student credit cards or credit builder cards. These cards may have lower credit limits and higher interest rates, but they can be a good starting point for building credit.
- Another option is to become an authorized user on someone else’s credit card, which can help build credit history. Just be very careful, because the other person’s activities with that card will reflect on your credit.
- Additionally, you can consider applying for a credit-builder loan or a small personal loan from a credit union.
- It may go without saying, but it’s very important to make all payments on time and keep your credit utilization low.
Build a Good Credit Score Brick by Brick
It’s crucial to view the job of building a good credit score as a process. It will take some time, but not as much as you think. Building brick by brick will be much more beneficial than trying to rush the process. When you open too many credit cards in a short amount of time, that will negatively affect your score.
As you open up credit accounts and pay them regularly, you can ask for higher limits, some say every six months. This will boost your credit score…especially if you don’t max out your accounts.
Another important part of the process is to regularly check in on your credit report. You need to be vigilant for errors. They can happen. Correcting errors quickly will help you build a good credit score. Also, keeping on top of your credit report will alert you to any fraud that happens. Unfortunately, fraud is prevalent, an inconvenient part of modern living.
How to Build a Good Credit Score Lenders will Love
Thanks to Blair Warner, Senior Credit Consultant of Upgrade My Credit for this informative video. Contact Blair Warner for further information and services. 817-886-0302. Blair can help buyers with their credit in all 50 states.
If you’ve faced any unfortunate circumstances that have negatively affected your credit score, you can still build a good credit score. You may want to consider professional help. Credit repair, credit enhancement and education about maintaining good credit are all available and have proven to be a big help to home buyers. For more videos concerning your credit score, see our YouTube Channel playlist: Your Credit Score
If you are looking to purchase a home in Central Maryland, Chris Highland with eXp Realty is here to help first time buyers navigate the waters of real estate. Ask us about Buyer Representation.
Your path to a smooth and informed real estate experience starts here. Let’s make your property dreams a reality! 🌟
Chris & Karen Highland
eXp Realty – 301-301-5119
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