Since the vast majority of us do not have the ability to pay for a house in cash, credit and credit scores will probably come into play when considering your options for purchasing a home. If you are going to purchase a home in the somewhat near future, confirming your credit score is what it should be is a good first step. Finding out your credit score is fairly straightforward, and you are entitled annually to one free report with each of the three major credit bureaus. Once you have your credit score, then what? There are a few steps you can take to improve your credit score (or maintain a good score if your credit is already high).
If you’re looking at your credit score and need to make some improvements, WHERE you buy doesn’t matter as much as knowing WHAT gets recorded, HOW MUCH you should put on credit, and WHEN you should pay.
WHERE should you shop: Your credit score is not directly affected by where you shop. Individual transactions are not reported to credit bureaus, which means it doesn’t matter (to your credit score) if you are shopping at Walmart or Nordstrom and everything in between. The exception to this would be if you had a specific store credit card, because it is a line of credit.
WHAT does get recorded: If where you shop doesn’t matter, what does? One thing that is recorded is the types of credit you have. While your mind may jump immediately to credit cards, there are other lines of credit such as auto loans, student loans, mortgages, and more. Generally, if you are making payments on it, it counts towards your credit score.
HOW MUCH should you put on credit: There is no magic number that will guarantee good credit. Everyone’s situation and credit is different. What is important is the ratio of the amount owed on your card in proportion to the credit limit of that card. This obviously doesn’t apply to fixed amount loans such as car or student loans, but is more specific to credit cards. In an ideal world, your credit limit will be high and your balance will be low. One easy way to work on this is to make small purchases using your credit card that you can pay the full balance monthly. Paying down your credit card and lowering the debt to credit ratio is one of the best ways you can increase your credit score.
WHEN should you pay: In addition to your debt:credit ratio, the other critical aspect of building credit is when you pay your bills. Even making minimum payments can help increase/maintain your credit score as long as they are made ON TIME. Set reminders on your phone, mark it in red on your calendar, schedule payments in advance, or set aside 1 or 2 days a month specifically for paying bills. Consistency is key here. Do whatever is in your power to not be late.
*note on payments: sometimes, emergencies happen. If you have a history of paying on time, it may be possible to defer a payment, such as a car payment, for a month if you need access to cash. (When our base was hit by a major hurricane, we deferred a car payment to help mitigate evacuation expenses). Because a deferred payment is not a missed payment, it does not affect your credit.
Keep in mind having a credit monitoring service watching your credit report is an extremely useful tool in the planning stages of a mortgage loan. You’ll want to know if there are issues appearing in your credit report that could stop or even cancel your home loan. Our partner IDIQ has daily credit monitoring services that offers an insight to when changes are made to your credit report profile. They actively monitor your Social Security number, change-of-address notifications, international and national most-wanted lists, and for your information on the dark web to ensure your identity is protected before you begin thinking of purchasing a home, during and after.
Building and maintaining good credit can seem daunting at first, especially if money management is not your strong suit. But start with small steps, and work up from there. Don’t get discouraged if you don’t see results immediately, and keep the end-goal in mind: a home of your very own.
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