Path to Home Ownership: Credit

Start Here : Managing your Credit Score

Do you know your credit score? Do you know what a credit score is? Unless you plan to purchase a house with cash you will need a loan to purchase a home. To do this you will need to show lenders your credit worthiness. A credit score is not the only consideration by lenders but it is an important one that may take time to improve. Managing your credit and improving your score is the first step toward home ownership.

Credit scores range from 300 – 850. A higher score, say 700 up to 850, indicates to lenders that you can manage your finances responsibly and are likely to pay back any money loaned to you. Knowing your credit score will help you determine what you need to do to improve your score and remove a huge obstacle from attaining your goal of home ownership.

Do these 5 things things to improve your credit score

1. Pay your bills on time. Every time.
   Paying a bill late has a negative effect on your credit score. From phone bills to auto loans, hospital bills and even Netflix, how and when you pay your bills signals to lenders how you manage your money. We can go deep into the weeds about how late, what kind of debt, and different methods of calculating the effect of late payments on credit scores, but is that really how you want to spend your time? Even if you have a mountain of debt, you can begin to improve your credit score by paying everything you can on time. For more tips see: Never miss a payment
   
2. Maintain low credit usage.
   When it comes to credit cards, or revolving credit, there is a limit to how much you can borrow. This is called a credit limit. The closer you get to the limit the more it will affect your credit score. This factor is one of the easiest to manage to improve your credit score and there are two ways to improve it. The first, and most beneficial, is to pay down your balance. The second, and least preferred, is to ask for an increase to your credit limit. If you do both, pay down your balance AND increase your credit limit it will have the greatest effect on your credit utilization ratio.
   
3. Only borrow what you can afford.
   If you stick with the first two principals you will eventually get to a place where your credit will no longer act as a liability, but become an asset. If you have already acquired a mountain of debt just remember this, mountains can be moved.
   
   
   
   Pay off as much credit card debt as you can and get your spending under control. You may have the option to wave the magic wand of bankruptcy, but you will likely wave away the near term chance of home ownership with it.
   However, once you have eliminated credit card debt from your life, you can make the credit card company pay you back!! If you can get a credit card that offers cash back, pay it on time and in full every month (re: Step One and Step Two), you now get a discount on the things you need to buy anyway i.e. groceries, gas, phone bill, and even some utilities.
   – Use your credit card to set up autopay with whichever bills you can and you will never have a late payment.
   – Maintain a balance in your checking or savings account that is equal to or greater than the balance on your credit card.
   – Pay the balance in full each billing cycle.
   – At the end of the year, use the cash back to pay bills or reward yourself for not spending money on late fees, overdraft fees, and interest.
   
4. Monitor your credit report.
   There are three credit reporting agencies-Experian, Equifax, and Transunion-that collect your financial information and sell that information to lenders in what is called a credit report. Check your credit reports annually and take advantage of a FREE credit monitoring services provided by your credit card or financial institution. Knowing what is on your credit report allows you to identify inaccuracies and even fraud long before it is time to secure a loan to buy a home.
   You can access your credit report for FREE as required by federal law at https://www.annualcreditreport.com
   
5. Follow the first four steps and be patient.
   Improving your credit score and maintaining it takes time. Like going to the gym, you will not be in the best shape of your life the first time you go or even after a week. If you want to run five miles, start by running one mile. Set small goals, like paying double the minimum balance on your credit card or not going out to eat for a month. Make it something simple and achievable. Then do it again!! Doing something you have already done is always easier than doing it the first time. Set new goals as the initial goals become habits. If you can run one mile five times you’ve hit your goal!! Now how about ten miles? You are already halfway there!!