Are you ready to take on the challenge of becoming a homeowner? If so, building your credit score is one of the most crucial steps. Your credit score will determine what kind of loan options you have and, therefore, what kind of house you can purchase. However, building up your credit can be daunting for many people. In this blog post, we'll discuss the tips and tricks for increasing your credit score when it comes time to buy a house.
How To Build Credit To Buy A House
Building credit takes time, but following these steps can help you get the score you need to buy a house:
1. Know What’s On Your Credit Report
Knowing your current score is one of the most important steps in building up your credit. Many banks or credit unions offer free access to your credit report, so take advantage of this service to understand where you stand and what work needs to be done.
2. Make Payments On Time
Your payment history makes up a large portion of your overall credit score—as much as 35%, according to Experian—so you must make all payments on time. Set up automatic payments for your accounts when possible. If you need reminders, create calendar alerts or have family members check in periodically about upcoming due dates.
3. Pay Off Your Credit Cards
If you are already carrying debt on credit cards, focus on paying it fully and as quickly as possible. Reducing or eliminating this balance can help improve your score significantly. Debt to income ratio is another factor that credit bureaus consider, so try to keep your debt load as low as possible.
4. Limit Spending To 30% Of Your Limit
Try to keep your monthly charges below 30% of your total available credit, as this shows lenders you’re not financially overextended. If you reach the 30% threshold, stop charging until after the statement closing date so that your balance is lower for the next month.
5. Avoid Opening Multiple Accounts At Once
Opening several credit accounts at once can signal to creditors that you are desperate for money or unable to manage your finances properly. Instead, open one account at a time and stay disciplined about using it responsibly.
6. Don’t Close Accounts
Closing older credit cards can temporarily cause your score to drop because you are reducing the amount of available credit to lenders. However, if you haven't used those cards in years, this rule doesn't apply—go ahead and close them, as they won't impact your credit score anyway.
7. Try Not To Move Around Too Much
Stay put in the same home for an extended period so that creditors know you are reliable and responsible regarding housing payments. Moving homes frequently makes lenders worry that you won’t be able to keep up with monthly mortgage payments on a new home. Mortgage lenders also look for consistency in employment and will want to see that you have been at the same job for a while.
8. Ask For Credit Increases
As long as your current accounts are in good standing, you can ask for a credit limit increase which could improve your overall score by increasing the amount of available credit to lenders.
9. Add Yourself To Someone Else’s Account
If you’re new to building credit, take advantage of authorized users on an existing account—such as a parent or spouse—with a solid payment history and low balance. This will help boost your credit score quickly because it adds another positive item to your report.
10. Check For Mistakes In Your Reports
Periodically review each of your three major credit reports—Equifax, Experian, and TransUnion—to make sure there are no errors. Contact the credit bureau immediately if you find any, and they will help you dispute the information. Credit reporting agencies are obligated by law to investigate and resolve the issue within 30 days.
Why Do You Need Good Credit To Buy A House?
Credit is an important part of modern life that can affect your ability to purchase goods and services. It helps lenders assess if someone is trustworthy and responsible enough to give them a loan, especially for larger purchases such as a house or vehicle. Credit works by tracking your spending patterns and evaluating how well you have managed debt over time. Credit utilization ratio, payment history, and length of credit history are all factors that a lender looks at when assessing your eligibility for a mortgage.
Good credit will yield positive results when making a major purchase, such as lower interest rates and better repayment terms. In contrast, bad credit may completely disqualify you from being approved for the loan. A good credit score is a must if you're looking to buy a house, as it will make the process go much more smoothly and quickly. In short, building up and maintaining good credit history is essential for most significant financial investments.
What Are Some Of The Benefits Of Having Good Credit?
Good credit can open the door to many opportunities that may otherwise be unavailable to you. A good credit score often leads to lower interest rates when taking out loans or even no-interest financing from major retailers. Good credit also allows you to make large purchases on your terms, such as buying a home or investing in stocks and bonds. Finally, it can make it easier for you to start your own business or obtain financing for existing ones.
Final Thoughts
Good credit is essential if you want to buy a house, as it simplifies the process. Thankfully, there are many ways to improve your credit score and make it easier for you to achieve homeownership. Just remember that building up your credit takes time and patience—but with these tips, the result will be well worth it.
If you're looking to purchase a house but don't know how to build the credit necessary for loan approval, Bolder Money is here to help. We understand the importance of having good credit and can guide you through raising your score. Our coach-based approach helps you understand the process and provides personalized advice to make reaching your financial goals easier and faster.
