Credit 101 – What You Need to Know Before Buying
When preparing to purchase a home, whether its your first time or your fifth, your credit plays a major role in your buying power. There are a variety of steps you can take NOW to make sure your credit score is in top shape ahead of your home search.
First things first, it is important to understand WHAT credit is and what factors can impact your credit, for better or for worse.
What things can impact your credit score?
This is the most important component when calculating a credit score. Lenders want to be sure you will pay back the debt on time. Payment history accounts for 35% of your FICO score*.
This ratio is the total of balances on all your credit cards divided by the total of all your credit limits. You should aim to use about 30% or less of your credit. Credit utilization accounts for 30% of your FICO score*.
Credit History Length:
How long you’ve held credit accounts is also calculated into your credit score. This includes your oldest and newest accounts. This makes up 15% of your FICO score*.
Credit scores can also become higher with a more diverse portfolio of credit accounts. These accounts include things like a car or student loan, mortgage, or credit cards. Credit mix makes up 10% of your FICO score*.
10% of your FICO Score* is determined by accounts for new credit accounts you have recently opened and the number of hard inquiries lenders make when you apply for credit. Hard inquiries are when a creditor has requested to look at your credit file.
*% are based on FICO Score 8 model
What are credit blemishes? How can you repair blemishes on your credit score?
Credit blemishes are information on your credit report that is false or inaccurate. These blemishes can include information that does not actually belong to you, accounts that should have a zero balance but currently don’t, or false reporting of late payments. Be sure to keep all documentation when getting these issues resolved with the credit reporting bureau. These will be important when beginning the mortgage application process.
Behaviors that impact your credit score:
Credit utilization is the portion of your available credit that you use. The less available credit you use, the better your score will be. You should aim to use about 30% or less of your credit.
If that is difficult, try requesting a credit line increase. Another way to avoid spending more than 30% of your credit limit, is to track your cards and set up balance alerts.
Credit Tip: If your balance gets above 30%, make a payment. Making a payment twice a month instead of once can help keep your balance lower.
Prompt bill payment
Payment history is the most valued component when measuring your FICO Score*. Even one late or missed payment can have a negative impact on your credit score. If you are looking to improve your credit score, be sure to always pay all of your bills on time every month.
Credit Tip: An easy way to avoid missing a payment is setting up statement alerts or automatic payments.
Applying for a lot of credit in a short period of time can have a negative impact on your credit score. Hard credit inquiries can stay in your file for two years and too many inquiries could show signs of being in a bad financial situation.
Paying bills in full
Instead of just making the minimum payment, pay the entire statement balance. This will also help with keeping your credit utilization low.
Monitor and Dispute
Make sure to monitor your credit and dispute any negative or inaccurate reports, especially incorrect late payment entries.
Buyer Beware: What to know about “Fix Credit Fast” Solutions
You can fix your credit, but you should beware of “fix credit fast” models. It’s important to remember that a “quick fix” also might be temporary.
If you are disputing false reports, this may cause a rise in your score. If they are proven to be inaccurate your score will be fixed, but if those strikes against credit are accurate are true, then your credit score will not improve.
For credit issues not related to blemishes, you will have to work to repair those over time, through making payments on time, and monitoring and managing your credit utilization.
Building credit takes time, patience, and self-control. It’s important to develop good financial practices even if you are not currently planning on saving for a large purchase. It takes time to improve your credit score so it is beneficial to start while you are not under the pressure of an upcoming payment. Over time, good habits will stick and lead you to have better credit long term.
What Affects Your Credit Scores? | Experian.com
Tips for Lowering Credit Utilization | Nerd Wallet
12 Simple Steps to Repair Your Credit and Increase Your Credit Score | Inc.com