6 Credit-Building Myths First-Time Home Buyers Need To Know
Credit is one of the most important aspects of our lives. It's what allows us to purchase big items such as cars and homes, and it's essential for our financial security. Unfortunately, a lot of people don't understand credit and the credit-building process. As a result, they make some costly mistakes that can damage their credit score and make it difficult or impossible to buy a home.
In this article, we'll discuss six common credit-building myths that first-time homebuyers need to know about. We'll also provide tips for building good credit so you can get into your dream home sooner rather than later.
Myth 1: Debt Is Bad For Building Credit
The first credit-building myth we'll discuss is that debt is bad for your credit. This is a common misconception, and it often prevents people from borrowing money when they need it most. For example, let's say you have really good credit and want to buy a car. However, you don't have enough cash on hand to make the purchase. What you can do is take out a loan for the car and make monthly payments on it—just like you would with any other debt, such as a credit card or student loan. However, some people are hesitant to borrow money because they think using debt will lower their credit scores.
The debt-to-income ratio (DTI) is a measure of how much debt you have compared to your income. It's one of the most important factors lenders look at when determining your creditworthiness. Your DTI will be affected by both the amount of debt you have and the amount of money you make.
For example, let's say you have $5,000 in debt and you earn $50,000 per year. Your DTI would be 10% ($5,000/$50,000). This is a relatively low DTI, so it would be easy for you to get approved for a loan. However, if you had $30,000 in debt and the same annual income, your DTI would be 50%. This is a high DTI and would make it difficult for you to get approved.
When trying to be approved for a mortgage, it is a good rule of thumb to have your debt to income ratio under 30%. Most lenders want to see no more than 1/3 of your income going towards your overall debts, which also includes your home.
Myth 2:To Build Credit, You Must Use Credit - Lots Of It!
While it is true that using credit can help you build credit, it's important to note that everyone's credit limit is different. In fact, your credit limit may be lower than you think. This is because your credit score is based on a number of factors, including your payment history, the amount of debt you have, and the age of your credit accounts.
That being said, a good rule of thumb is to use no more than 30% of your available credit. So, if you have a $10,000 limit on your credit card, you should try to keep your balance below $3,000. This will help show lenders that you're responsible with your credit and can handle multiple debts at once.
Myth 3: Close Your Credit Cards Once You’ve Paid Them Off
When you have a credit card and you pay it off, some people think it is a good idea to close the account. While this does seem logical, it can actually be detrimental to your overall credit score, especially if it was one of your longest opened accounts.
Credit history plays an important role in your ability to apply for more credit, making up around 15% off your credit score. Instead of closing your accounts as soon as they are paid, a better idea would be to leave them open, utilize them on occasion and ensure you pay the balance whenever possible.
Myth 4: The Occasional Late Or Missed Payment Is No Big Deal
In an ideal world, every credit card balance would be paid in full before it is due, however, that is not always a possibility for everyone. While the odd missed or late payment may not amount to a huge hit to your credit score, making it a habit of it will definitely become an issue.
Your ability to pay your bill on time accounts for a large portion of your credit score, roughly 35%. The longer you are able to make your payments on time, the better.
If you find yourself unable to pay your bill by the due date, call your credit card company and ask them if they can offer any extensions or discounts for good customers.
Myth 5: You Can Boost your Credit Score By Adding Your Spouse Onto Your Accounts
It is not that simple to boost your credit score by adding your spouse to your account, but it is helpful if they have good credit. While credit scores are completely individual, having a partner with a high credit score will be beneficial when applying for a mortgage as your lender will be looking at both the applicant's scores, often time averaging them out.
Once you have secured a loan as a couple, and pay your mortgage on time, this will start to improve your overall credit score.
Myth 6: Getting A Credit Report Will Lower Your Score
An inquiry is when someone looks at your credit history. But not all inquiries are the same. There are two different kinds of inquiries: hard and soft.
A hard inquiry is an inquiry where a lender checks your credit to see if you can get a loan, usually for buying a house or car. A soft inquiry is one that usually happens when people want to check out your credit, but they're not going to give you money right away. It's not harmful to have them happen, but many lenders may not like to see too many hard inquiries over the recent months.
When it comes to credit-building myths, it's important to know the facts. And if you're a first-time homebuyer, you need to know all there is to know about credit and mortgages. That's where real estate professionals come in. They can answer any questions you may have about your credit score and what lenders are looking for when you apply for a mortgage. So, don't be afraid to ask for help.
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