Credit Basics: Establishing and Maintaining Good Credit
To buy a home, you need to have good credit. SmartAsset says you need a minimum credit score of 660 to qualify for a mortgage loan, but the better your score, the easier it will be to qualify for a home loan. Another benefit to a good credit score is that you may qualify for a lower interest rate. Lower scores mean higher rates and, therefore, higher mortgage payments.
Here are some credit basics to help you establish and maintain good credit.
- Understand credit basics. You should know what credit is, how it works, and what the benefits of having good credit are. Credit is your ability to obtain goods and services now, and pay for them later. Lenders will let you borrow money at an agreed-upon amount, rate, and payment terms. Borrowing will help you to establish a credit history. Good credit can give you more options down the road, helping you qualify to borrow in the future and with more favorable terms. For more tips, see Wells Fargo’s “Good Credit Habits.”
- Know what establishes credit. This will help you establish short and long-term goals. This is particularly important if you will be buying your first home. If you have a student or auto loan in your name, you likely have credit. Try acquiring a secured credit card in your name, a gas or retailer card, or become an authorized user on a trusted person’s account.
- Know what constitutes a good credit score versus a poor one. An excellent credit score is having one at 760 or above, where having a poor one is 620 and below. Most lenders won’t let you work with them if your score is under 620. A good credit score ranges from 700-759. A higher score will mean lower interest rates, and a lower score will mean higher interest rates.
- Pay on time, every time. To establish good credit, you need to pay your bills on time every month. This includes credit cards, loan payments, line of credit payments, utility bills, medical bills, etc. The credit card and loan payments will show up on your credit report. Other bills like utilities and medical bills probably won’t, unless they are past due and go into collection. At that point, they will be added to your credit report, negatively impacting your credit score.
- Keep track of bank and credit balances. It is important to stay within your credit limits and to never exceed them. Wells Fargo suggests using 30% as a good rule of thumb. To maximize your credit score, use no more than 30% of your total credit limit and lines of credit. Online banking is a good way to track bank, loan and credit card balances. [Bonus tip: To avoid fraud, be sure to use unique and complex passwords for each account, and never access them from public WiFi.]
- Be financially responsible. Paying bills in your name – even those that won’t get reported to the credit bureau – demonstrate your responsibility with money and can help you qualify for additional credit. You can do things like open a checking account, use your debit card responsibly, avoid overdrafts, and build a savings account for your down payment.
- Pay attention to additional factors that affect your score. Other factors impact your credit score, including time at your job, time in the industry, overall payment history, total amount owed compared to your total credit limit, length of credit history, and new credit and types of credit used.
- Maintain a favorable debt-to-income (DTI) ratio. To calculate your DTI, add up all of your monthly expenses including housing, alimony or child support, loans, credit cards and other debts. Do not include groceries, utilities, gas and taxes. Divide your total gross monthly income – income before taxes – by your total debt. The result is your DTI ratio. Wells Fargo says a DTI ratio less than 35% is optimal, 36% to 49% needs some work, and 50% or more is a problem.
- Monitor your credit reports. There are three credit bureaus: Equifax, Experian and TransUnion. Monitor each on a regular basis to identify and correct errors and detect fraud. Every consumer is entitled to one free annual credit report. Click here to learn more.
These tips will help you establish and maintain a good credit score. For additional tips on how to qualify for a home loan, contact your local Realtor® or a mortgage lender.