One of the most important numbers you’re going to have hovering over your head through the home buying process is your credit score. The most commonly used figure, created by the Fair Isaac Corporation (FICO), is a picture of how trustworthy you are as a debtor. Realtors, mortgage companies, and many more institutions will use this statistic to gauge if you’re a responsible, top tier debtor or more of a “subprime borrower.” Having a lower credit score will lead to higher initial deposits and worse interest rates. To make sure your fiscal health starts as well as it possibly can, you need to take steps now to build it up!
How is Your Credit Score Determined?
When major financial agencies check and report your credit score, they go by five major factors. Most heavily influential of these is your payment history – or if you’ve been prudent about paying your debts on time. Also important is how much you’ve borrowed in relation to your “maximum.” In a revolving line of credit, in particular, lower credit utilization, or only borrowing small amounts, is much more favorable. Banks and agencies place the most importance on these factors because they best highlight your ability to budget your finances and prioritize paying off the debt you owe.
Less important factors (and factors you’re less likely to be able to change so early on) are the length of your credit history, what types of credit you have, and new forms of credit. These account for less of your credit score (cumulatively) than the other two. However, it would be best if you considered these factors in the future when you have more credit to pay off.
The first two factors alone will be enough to give you a good foothold on raising your credit score off the bat. Keeping the amount you owe low and paying it off on time, the same time every month, will start you off well. However, what kinds of credit can you take on to pay off? A mortgage or car payments probably aren’t in your immediate future, but smaller steps are.
The most common way to start building credit is to open a credit card in your name. It’s a fantastic place to start – credit cards are a form of revolving credit that you can control how much you need to pay back per month and budget accordingly. However, traditional credit cards often need good credit to off the bat. It sounds like a perfect catch-22 – you can’t build confidence without a credit card, and you can’t have a credit card without good credit.
However, for that exact reason there exist secured credit cards. “Secured” here means that the total amount you can borrow on the card is backed by a deposit you place with the bank upfront. The bank uses that amount to ensure that they won’t lose money on you as a debtor, and then you can use it as a regular credit card. Secured cards often have relatively low borrowing limits, but they’re suitable for just starting. Use it to buy groceries and gas, and make sure that you can pay back the amount every month, on time.
If you don’t have the cash to put down the sizable deposit, though, you can always opt to cosign with someone who already has a credit score. Cosigning essentially means that the person you sign with will trust you to place credit in their name. The benefits go to you, but any drawbacks will fall on their shoulders. Falling late on payments or overdrawing your line of credit will immediately place blame on your co-signer, which can cause penalties for them. They’ll have to pay your unsettled balance, their credit score can suffer, or they can even catch a lawsuit on your behalf. Cosigning is a massive responsibility for both parties, and betraying that trust can hurt twice as bad.
If neither of these options is viable, though, you can look towards smaller banks or institutions for credit builder loans. They’re designed for people either starting new with credit scores or repairing severely damaged credit. Often, they’re not well advertised either – it will take research to find an agency willing to offer those loans. However, using that loan to build credit is easy as can be. The money you pay every month goes toward a savings account that you’ll get the full balance off at the end of the term. Pay your debt every month on time, and watch your score improve as a result!
Reap the Rewards
With a credit score established, you can finally gain the trust of banks or mortgage companies to make significant financial decisions. Optimally, you want to aim for a rating higher than 700 to begin your journey – anything over 800 is considered “Excellent.” If you’re looking to buy a home for the first time, you should turn to First Choice Mortgage to help you get off on a good start. We prioritize our customer’s experience – making sure you’re knowledgeable and comfortable with your decisions at every step. We offer the resources to help you learn how to buy a house, all you have to do is visit our website and contact us!