Tips to Build Credit before buying a house. Building your credit responsibly is one of the first steps toward financial well being, and an absolute must when you are planning on buying a house. Having strong credit will enable you to get the very best mortgage at the lowest rate, meaning you will pay less interest over the life of the loan. If you have bad credit, however, there are some things you should know in advance. Not all lenders offer the same interest rates, so it pays to shop around. Here are some tips to help you learn how to build credit and get the low mortgage rate you want.
The first step toward building credit is to establish a good budget and learn to live within it. Every dollar you put into savings or investments is one more dollar you will earn at the end of the month. This includes every cent you pay in interest every month for outstanding credit cards, student loans, car payments, mortgage payment, etc. It also means cutting out extras such as eating out every night and splurging every once in a while.
If you want to build credit quickly, start with your existing credit cards. Paying off credit card debt helps your overall credit profile and reduces your risk of late payments and bankruptcy. Paying off small debts such as gas and oil company balances immediately boosts your credit score, which in turn helps your overall score. If you have credit cards with balances on multiple cards, pay them off every month to improve your score. You can also close unused credit cards and close account numbers once you have paid off the balance.
Having a bank account is not enough. To build credit, you must be a primary cardholder of that account. Credit card companies are not as concerned about your personal spending as they are about your authorization to use the account. This means you must have an active bank account in order to be an authorized user. Your bank should let you know how many authorized users you are and the penalties for canceling your account.
Another helpful tip is to know your credit utilization ratio, or credit utilization. The ratio is a calculation of how much debt you have versus how much you pay back each month. Banks calculate this ratio based on the amount you owe on your cards, plus the amount you pay monthly. The higher this number is, the better the ratio. This means if you are paying more than you take out each month, then you are using too much credit. In other words, don’t be a compulsive borrower!
One thing to consider when building credit is opening up multiple accounts. If you are using your garage as a business, consider getting a business line of credit. Your bank may even offer you credit cards account that has 0% introductory rates. If you have credit cards with zero percent introductory rates, it will be important to remember to cancel them before your introductory period ends.
If you are planning to start a family business, and one or more members of your family will handle the credit card accounts, you should add you as an authorized user on all of their accounts. You should always check to make sure you are not being added as an authorized user on someone else’s account. If you want to add you as an authorized user on your own family member’s account, you should call the customer service number on the card and ask for your family member’s authorization.
Finally, one way to build credit without credit cards is to get your major credit bureaus (Experian, Equifax, etc.) to report your history to them. This can either be done by getting them to mail you a form, or by contacting them by phone, email or in person. It is important to report your history to these companies because they review your reports regularly and can identify mistakes that have been made.