Do you know what your credit score is? If you plan to buy a home in the near future, you’ll want to find out right away. If your score isn’t high enough, you’ll need to increase it or you might not even be eligible to get a mortgage.
The average credit score for people in their 20s is 652 and the average score for people in their 30s is 671. Those are squarely in the “fair” range. Young people definitely have some room for improvement when it comes to their credit scores.
If you want to buy a house, keep reading. This article will give you some tips on how to build your credit to buy a house sooner rather than later.
How to Built Your Credit to Buy a House: Start Here
If you know you want to buy a house, the best thing to do is start saving young, building credit, and making sure your credit score stays strong. Of course, this is sometimes easier said than done.
1. Get Your Credit Report and Score
The first thing you need to do is request your credit report and get your credit score. You can get a free one each year from the three major credit bureaus. You should thoroughly review your credit report and make sure everything is accurate.
Your credit report does not include your credit score, though, so you may have to pay for that. A lot of credit cards or other lenders provide this to their current customers, though, so you might be able to get it free if you have an account with a company who does this.
2. Dispute Any Errors
If you discover any errors on your credit report, you need to submit a dispute in writing to the credit bureau that has the incorrect information. You should then also send a letter to the lender or company that reported the incorrect information.
You absolutely must do all of this in writing. Once you submit a dispute, the credit bureau has to investigate, usually within 30 days. You’ll also need to include documents supporting your dispute as well. Send copies, not originals.
3. Pay Off Delinquent Accounts
Your credit report will also indicate whether you have any delinquent accounts. If you have any accounts that have late payments, charge-offs, or accounts in collections, you should pay them off before applying for a mortgage. If you don’t, mortgage lenders will view you as a risky borrower who doesn’t pay their debts.
4. Pay All Bills on Time
You need to establish accounts with consistent on-time payments. You can essentially “bury” delinquent accounts (as long as you pay them off) with accounts that are paid on time, every month. The older the delinquent account is, the better your credit application will look.
It’s wise to wait a few months to apply for a mortgage once you get all of your accounts current. This demonstrates to lenders that you are currently a responsible borrower.
5. Reduce What You Owe
A big part of your credit score is the amount of debt you have. Revolving debts, such as on credit cards, hurts you more than installment loans (car payments, for example).
Lenders like you to use less than 30% of your available credit. For example, if you have $10,000 in available credit, you should limit your debt to less than $3,000 to have the best credit utilization ratio.
Paying down your debt is one of the surest ways to improve your credit score and prove yourself to be a worthy borrower.
6. Diversify Your Credit Accounts
Lenders like to see a good mix of revolving and installment account. If you have all credit card accounts, that could hurt your credit score.
It is possible to get a credit card even if you have poor credit. Even if you get one with a small limit, making a purchase and paying it off month after month will work in your favor. Bad credit credit cards can actually help you.
Revolving loans can change over time as you spend more of your available credit or pay them off. Installment loans, like students loans or a car loan, are for a fixed amount of time and you typically make the same payment each month.
7. Don’t Open New Accounts or Put a Lot on Credit Cards
When you get closer to applying for a mortgage, you should limit the number of new accounts you open. It might be tempting to open a new credit account to buy new furniture or run up your credit card balance at a home improvement or home decor store to decorate your new house, but avoid doing this.
Lenders want to see a stable credit history and they don’t want to see that you’ve recently opened a bunch of new accounts. It’s best to wait until after you close on your home to open any new accounts for furniture or home decor.
Avoid making any big financial changes while you’re preparing for a mortgage application.
8. Keep Older Accounts Open
In addition to avoiding new accounts, keep old ones open. If you close old accounts, even if you don’t really use them, you reduce your available credit, which increases your credit utilization ratio.
Keep the older accounts open and every few months, charge a small amount and pay it off right away. This will ensure the accounts don’t get closed by the card issuer for non-use and also work positively towards your credit profile.
9. Give Yourself Time
One of the most important things to remember is that changes to your credit score won’t happen overnight. You might have to adjust your timeline for purchasing a home to recover from past credit mistake.
The Bottom Line
Through consistent hard work, it is possible to build your credit up to be considered a worthy lender. The good news is that you can start immediately making small changes to improve your score and credit profile.
Use these tips for how to build credit to buy a house and when it comes time to apply for a mortgage, check out the most competitive current mortgage rates on our site. Then, you can apply for an instant online rate quote and get all of your questions about mortgage answered.