Get Great Credit!

Dated: October 20 2020

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One of the most important things needed to be able to buy a home for your family is to have a good credit score.  Unfortunately, most of us do not know what is needed to achieve good credit.  The good thing is, it’s not difficult as long as you know what you need to do.

Credit

Three Takeaways:

1) Pay on Time

2) Have balances 30% or less of limit

3) Don’t use too many lines of credit at once

So, why is credit important?  Not only can it affect if you get approved for credit or not, it affects what type of loan you can get, your interest rate, can even effect your insurance and sometimes it’s even used in employment screening. 

Here are some tips on how to improve your credit score, and keep your score high.

PAY ON TIME

Sounds simple, right?  But when life gets complicated or busy, sometimes we forget.  I’ve discovered a few strategies that have helped me to keep on time. 

Set the due dates of all your bills to be due about the same time.  Then you only have to remember once a month to pay the bills.  I know that between the 1st and 10th of the month, I need to pay my bills or I will be late.  You may also be able to schedule this to coincide with when you get paid. 

Set up your accounts for auto pay for at least the minimum payment due.  I’m not saying to only pay the minimum because then you’ll be charged lots of interest, but if you forget to pay in full, at least you won’t be late.

Set your accounts up on-line.  It makes it easy to pay, and then you don’t have to worry about bills getting lost in the mail.

HAVE BALANCES 30% OR LESS OF LIMIT

So this means if you can charge up to $1000 on your credit cards, only charge up to $300, or 30%.  This can make a huge impact on your credit score.  I have a line of credit on a home, and I needed to put on a new roof.  I maxed out this line of credit to pay for the roof, and my score dropped almost 50 points.  Wow!  Now, this isn’t important with a car or school loan (installment loans), but it is on credit cards and revolving lines of credit.

DON’T USE TOO MANY LINES OF CREDIT AT ONCE

You may think to show I have good credit, I need lots of credit cards, right?  Wrong!  At one point in time, my mother had a very high credit score (about 800) with only a mortgage and one credit card. 

Having many lines of credit (loans, credit cards) can just get to be too much to manage and increase your overall amount of debt.  Now, you don’t need to cancel them, just pay them off and don’t use them.  I have one I use, and one I have only in case I lose the first!

When you have many credit cards you are using, that is many payments per month.  That increases what’s called the debt-to-income ratio (DTI) so a mortgage lender won’t lend you as much money because you have too much debt, i.e. monthly payments.  For example, if I have 5 credit cards I’m using with a total of $500 of debt, and each has a minimum monthly payment of $50, that is $250 per month of debt payments.  Now, if I have one credit card I’m using with a total of $500 of debt (same amount), and it has a minimum monthly payment of $50, that is $50 per month of debt payments.  That means I could get approved to borrow more money since the bank uses your debt-to-income ratio to determine how much they will lend you.

Other recommendations:

Don’t spend more money on your credit cards than you can pay each month.  If you can pay the full balance due each month, you don’t get charged interest, but you do build good credit.  If you can’t pay the full amount, you are charged very high interest rates, 16% - 23%.  This makes everything you buy on that credit card much more expensive.

If it’s difficult for you to control your credit card spending, take the card, put it in a Ziploc bag full of water, and put it in the freezer.  That will force you to really think about using it for that next purchase.

Take the time yearly to review your credit report.  You can get a free annual credit report at annualcreditreport.com.  This does not give you your score, but you can see the detailed information that is used to determine your score.  Review this report to make sure the information is correct, and to see what you can do to improve it. 

When you spend your money, think about what is most important to you.  We choose how to spend our money, so be aware of your choices and what’s most important to you.  Is it more important for you to have a fancy car, or an extra $200 to save each month?  Is it more important to eat out every day or buy that coffee, or to take that money to pay off a credit card?  Ask yourself, is it more important to spend my money on _____________________ or to save for/pay off _______________________?

I know this was a long, but I hope you found value in it.  Feel free to contact me if you have any questions or when you think you're ready to start the home buying process.  Also, if you know a friend who may be interested in this information, please share.

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