Building Credit To Buy A Home
Are you a young adult hoping to buy your first home, but you’re being turned away for lack of credit history?
You’re not alone.
Experian says this:
“It's no surprise that young people with few credit accounts ("thin" credit files) tend to have lower scores than older folks.”
According to some recent data from Experian, Generation Z (born after 1996) is holding down an average score of 634, while "Silents" are almost 100 points higher, at 729. Generation Y, also known as Millennials, (born 1982-1995) doesn't fare much better at 638, and Generation X (1967-1981) is 658. Only when the age scale reaches Boomers (1947-1966) does the average surpass 700 (703).
It’s the age old conundrum… building credit can be awfully tough if you have no credit debt. And it’s difficult to GET credit debit if you have no credit history!
If you have one or two small credit cards, you may have what you need to get started. If you don’t, it might be time to take out a “secured” credit card. (That’s a credit card that requires a deposit).
Installment loans, like a car payment or student loans are another way to start building credit. Just be careful to not take on too much because it could affect your debt-to-income ratio and your ability to qualify for a home loan.
There’s some great advice for building credit here: https://www.creditkarma.com/advice/i/how-to-build-credit-from-scratch/
Stay On Top Of Changes
You’ll want to pull your free credit scores from each of the 3 credit bureaus at https://www.annualcreditreport.com/index.action. Federal law entitles you to a free copy of your credit report as often as once every 12 months .
After you’ve pulled the official reports (or if you have trouble pulling yours), it’s a great idea to get hooked into a service like CreditKarma. Just visit: https://www.creditkarma.com/ to sign up. There, you’ll be able to keep tabs on the day-to-day changes in your score and the items on your report for FREE. They also offer credit recommendations and a few other great services, like free tax prep software.
Keep On Keepin’ On
Once you get some credit, it’s critical to keep up the positive movement by using the credit responsibly and ALWAYS being on time with your payments.
Put monthly payment reminders in your calendar. Set automated drafts and payments to ensure the debts are always paid.
Keep your debt load DOWN while building credit. It’s important that you USE your credit, but not too much. You’ll want to keep your debt load in the range that banks and the credit bureaus consider “ideal.” In fact, how much you owe, versus how much credit you have available accounts for a whopping 30% of how your FICO® Score is calculated!
For best results it’s critical to keep your credit card balances at 30 percent of the credit limit, OR LESS! In fact, many credit experts say for BEST results, you should keep your balances below 25 or even 20 percent of your credit limit.
This “credit utilization” rule applies to each card individually, AND to the cumulative limits of all your cards.
Building credit takes time. Follow the steps above and any recommendations you can find on the credit bureau websites. You might even want to reach out to your bank of choice and schedule an appointment with a mortgage loan officer to talk about their criteria for home loans and what goals you should be setting to qualify. Once you know where you need to be, and are taking the steps that will get you there, all that’s left is to be patient and STICK WITH IT.
We can’t wait for you to achieve your financial goals, so we can help you achieve your REAL ESTATE GOALS!