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Building Your Credit to Buy a Home

Why are so many people worried about their credit score? What does it matter what kind of score I have? Why should I worry about my credit? You may have asked yourself these questions at some time or another, or have struggled with a similar quandary, but what is the answer? What is credit and why is it so important?

What is credit?

Credit is not as complicated as you think. It is essentially a way for a bank to grade you on how responsible you are with money. Banks and other establishments can access a giant database with everyone’s credit score so they can know whether they can trust you enough to lend you money. Usually a credit score will be a number between 300 and 850 or so and ‘good credit’ is considered to be a score above 700 in most cases.

Why should I be concerned with my credit score?

As stated earlier, your credit score determines whether the bank will lend you money. If you want a loan to buy anything, or a credit card for that matter, you will want to have a good credit score. However, once you are approved for a credit card, loan, or anything of the sort, a higher credit score will mean a lower interest rate. (The interest rate is, in essence, how much the money costs to borrow; for example, if you borrow $20 you will have to pay the bank back $25 dollars).

Your credit score can also effect what kind of down payment you will have on the loan. A down payment is usually required by the bank or loaning party of the person taking out the loan. The down payment is used as collateral against the person in case they default on their loan, that way the bank does not lose as much money. However, even though a lower down payment can be achieved with a higher credit score, when a higher down payment is paid, the smaller loan the person will need to take out. This is because the down payment is taken out of the whole loan. So, instead of owning the bank $100, if you pay a down payment of $20, you will only take out a loan for $80.

Credit scores can also be used when trying to get a job. This has nothing to do with loans, but rather how responsible you are with your money. If you apply for a job at a bank or any other financial institution, a low credit score could cost you a job.

How are credit scores calculated?

There are three major companies that compile your credit score and each one of them uses a different algorithm to do it. This means your credit could be different depending on which company you ask. Essentially, all they do is grade you on how you use your borrowed money. For instance, credit card payments, payments on student loans, etc. Sometimes, however rare it may be, there are sometimes that these companies will check to see how well you pay your utility bills.

What about buying a home? Why is credit important?

When buying a home, you will be taking out what is called a mortgage which is a special kind of loan that is specific for a house. Sometimes, mortgages are even called home loans. So, when it comes to your credit, if you have a high credit score, you will be approved to buy a bigger or more expensive house. Adversly, low credit will limit you on what you can buy and could make it hard for you to get the home you want.

Also, the interest rate on your mortgage is determined by your credit score—just like with any other loan. The interest rate on a mortgage is, usually, reapplied to the remaining amount of the loan every year. So, if you have a lower interest rate, your payments on your home will be exponentially lower.

How do I raise my credit score?

Raising your credit score is not as tricky as you might think. All you need to do is to show the bank that you can use money responsibly and one of the best ways to do that is with a credit card. If you do not have a credit card, you should get one and use it responsibly. If you already have a credit card, try to get the limit down as soon as possible and keep it down. Now, it is not enough to have a credit card and keep it at a 0 balance, you need to use it. It has been said that you should not charge more than 50% of your card’s limit to the card in any month; you should then pay it off within a month or two. This will help to build your credit very quickly.

If you are worried about using a credit card, simply use it as you would your debit card and only charge money to it that you can pay off. For example, if your debit card has $25 dollars on it, then you only use $25 of your credit card so you can pay it off completely as soon as possible.

Next is to make sure you pay everything on time. Whether it is a credit card bill, a utility bill, or a bill on a car loan, pay it on time. However, when it comes to credit card and loan payments, as long as you make the minimum payment, it will not damage your credit.

After you have been using a credit card for a few months, responsibly, you should talk to your bank or credit union about raising your limit. If your limit is raised it shows that the bank trusts you and it will raise your credit as well. Once it is raised higher though, make sure not to charge more than you can pay off as that will reflect badly on you. (Unless, of course, it is an emergency, then use what funds you need)

In the instance that you have credit, but not enough to quality for a mortgage, then try to get a smaller loan first. Smaller loans can be ones for furniture, a car, or a large purchase at a department store. (Now days, most department stores offer some sort of payment plan or credit card service that you can take advantage of).

What if I am starting with no credit at all?

The first thing to do if you have no credit is to talk to a bank or credit union, they will have starter programs available to you that will help you to build your credit. Most financial establishments will have some sort of beginner credit card or something of that sort to help their members or clients.

If getting a credit card is not an option, you may talk to your bank or credit union about getting a secured credit card. This is a simple system that just about anyone can use. They are essentially a card that you buy for the amount of the limit. To get one you will give the bank a predetermined amount (say $1000) and then they will give you a credit card with that limit. You will then use it like a normal credit card, paying it off as you buy things. When you move up to a real credit card though, assuming that you have paid off any charges put on the card, you will get the $1000 back.

Lastly, try getting a loan from a department store for something small like a computer or television. As stated previously, most department stores will gladly lend you money to buy their merchandise. The interest rate will be steep, but it will be a way to get your foot in the door to having good credit.

How long does it take to raise my credit score?

Raising your credit score will take time, so you will need to be patient. It is advised to use these strategies for about 6 months to a year and, after that time, have a loan officer check your credit score again. Your efforts should be reflected in your credit score by then.

If buying a home is one of your dreams and you don’t have any credit, do not worry, you can improve your credit. Follow these tips and talk in depth with a loan officer to make a plan specific to you and your needs.

To learn more about raising your credit, buying a home in Boise, Idaho, or anything else real estate related, contact one of our licensed agents; they will be ready and willing to help you with anything you may need.

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