If you want to purchase a new home, it is important that you understand the role your credit will play in your ability to get approved for a mortgage. Lenders review your credit score and history to ensure that you are a reliable candidate for a loan. A high credit score can help you secure a great mortgage, but people with lower scores can still qualify for a mortgage with higher interest rates. If you currently lack credit, now is the time to learn how to build your credit. Everyone has to start somewhere.
How to Build Your Credit
Check your credit score.
First, learn where you stand by checking your credit score. Order a copy of your credit report from the three major credit-reporting agencies: TransUnion, Equifax, and Experian. You can get a free copy of all three by going to annualcreditreport.com. Review your credit reports carefully, and if you notice anything negative that has been incorrectly reported, dispute the information with the agency. Credit-reporting agencies must remove disputed information if they cannot verify it within 30 days.
Consider getting a credit card.
If you’re trying to build a credit history from scratch, consider getting a credit card. Choose a card that reports to all three credit-reporting agencies, and check out options available to people with little or no credit, like secured credit cards, student credit cards, or retail credit cards. Lenders prefer that people have several different tradelines (credit cards, auto loans, student loans, etc.) that have been active for at least one year.
Use your credit responsibly.
Once you have established a line of credit, use that credit responsibly. Pay the entire balance of your bills on time. If your debt utilization ratio is higher than 30 percent, it could damage your credit score and hurt your chances of obtaining a good mortgage (source). Use this fresh start as an opportunity to form good habits, creating a solid foundation for an excellent credit score.
Don’t close older accounts, and avoid opening new ones too often.
Some people make the mistake of thinking that they should close older accounts that they no longer use. Avoid this if you can. A long credit history can help raise your credit score. In addition, avoid opening too many new accounts at once, because applying for a new line of credit can cause a temporary drop in your credit score.
Building an excellent credit score takes time. Use your credit responsibly, don’t make any rash moves, and monitor your score each year to check for errors and examine your progress.
While it may take some time to increase your credit score, now that you know how to build your credit, you’re ready to get started on the right foot.