Having a good credit report is important for all your financial goals, but it is essential when you are applying for a mortgage loan.  Your credit history plays a significant factor in gaining approval for a mortgage. 

Your credit score is your credit history summed up into a single number - your  FICO Credit Score.  With this score, lenders can determine if you qualify for credit when you are applying for a credit card or loan.  It is calculated using five different components:

  1. Payment history - 35%
  2. Credit Utilization - 30%
  3. Length of credit history - 15%
  4. New credit - 10%
  5. Credit Mix - 10%

While waited differently, each of these components matter when determining your credit score, so none should be overlooked when building and maintaining your credit history.

Good credit matters because buying a house is one of the largest financial investments you will make, and you must be financially prepared to take on the expense of a mortgage.  Without a strong credit score, a lender may decide that you are not ready to take on the financial responsibility of owning a home. The higher your credit score, the better the chances are that you will be approved for a mortgage loan.

Building good credit takes time.  It’s something you should start working on as soon as you enter adulthood.  As a young adult you may think that buying a house is a long way off, but it is never too early to start establishing good credit. And even if you have a not so good credit report you can work on strengthening it.  Not sure where to begin?  Here are five ways to start building a strong credit history:

  1. APPLY FOR A SECURED CREDIT CARD - If you are just starting out you may need to apply for a Secured Credit Card.  This is a card that is backed by a cash deposit.  The deposit amount will be the same as your credit limit. You use this card like any other credit card; make purchases and make payments on or before the due date each month.  You will incur interest if you don’t pay your balance in full and your cash deposit will be used as collateral if you fail to make payments. Secured credit cards are not meant to be used long-term.  The purpose of having one is to help qualify you for a card that does not require a deposit to secure it.  When you close your secured credit card account, you will receive your deposit back.
     
  2. ASK SOMEONE TO CO-SIGN A LOAN FOR YOU - You may be able to secure a loan or unsecured credit card using a co-signer.  Just be sure the co-signer understands that he or she will be responsible for the full amount of the loan (or credit) if you are unable to pay. How to Get a Personal Loan with a Co-Signer
     
  3. DON’T MISS OR BE LATE MAKING PAYMENTS - As seen above, your payment history makes up 35% of your credit score.  Financial responsibility is a large factor of your overall credit history and can make or break your ability to obtain new lines of credit, such as a mortgage loan.  Always pay your bills before or by your due date.  Late or missed payments can seriously harm your credit score.
     
  4. TRY TO PAY MORE THAN THE MINIMUM DUE - While the minimum due is all that you are required to pay each month, it will serve you well to make larger payments to show your creditworthiness. At the same time, you will be reducing your debt at a faster pace and paying less interest over time.
     
  5. DON’T OPEN A LOT OF ACCOUNTS AT THE SAME TIME - New account lower your average account age, which could lower your credit score.  The longer you have accounts open and active, the better off you are (as long as you are making payments on time).

By establishing strong credit early, you will be well on your way to acquiring a mortgage loan when you are ready to buy a home!

If you are in the market to buy or sell a home in the Memphis area, contact professional Realtor, Melissa Thompson, and let her help you with all your real estate needs. Give her a call at 901-729-9526 today!