Building strong credit to achieve home ownership

If home ownership is something you see in your near- or long-term future, now is the time to begin establishing a great credit report in order to qualify for a home mortgage loan at a good interest rate.  For today’s millennials juggling student loan debt. But it can be done.

Understanding the two types of credit

Debt is categorized as either revolving or installment. Revolving debt includes credit cards and accounts used at specific stores. Revolving accounts come with a maximum limit against which you can borrow, and the minimum monthly payment required that is applied against your principal and interest.

building strong credit

Installment accounts apply to fixed loans, which are repaid with scheduled payments over a pre-determined number of months.  Installment accounts include student loans, car loans, mortgages, personal loans, and other loans for which payments are applied regularly to reduce the principal loan amount, eventually resulting in the loan’s full repayment.

Revolving accounts generally have higher interest rates and fees than installment accounts.

With this basic understanding of credit types in mind, below are four important tips for building a strong credit history:

1: Establish and maintain your credit report
Everyone needs good credit to get ahead. Good credit allows people to obtain more credit and higher credit limits when they need it. First-time borrowers may want to start establishing credit by obtaining a “secured” credit card. Secured credit cards are self-funded, so if you put $250 on a secured credit card line of credit, you have a credit limit of  $250. Many financial experts recommend that people who are just beginning to establish a credit history use this type of card for routine purchases such as gasoline, Uber fares or an occasional lunch and then pay the balance in full each month. The longer you pay down the balance of your secured credit card each month to keep the account in good standing, the faster you’ll build a credit history and the stronger it will be.

2: Pay on time each month
In addition to paying down the balance, an individual’s credit history reflects the timeliness of their payments. Making late payments or skipping them some months will reduce your credit score and can stay on your credit report for several years. In addition to the blip on your credit history, late or skipped payments can also carry some also stiff penalties. For instance, credit card companies may raise your interest rate after a missed or late payment, and you may incur late fees. If you pay your car loan late or stop paying it altogether, car loan companies may repossess your vehicle. Student loan interest continues to accrue when payments go unpaid, and all of these scenarios not only hurt your credit history, they increase your debt making it harder to catch up. Mortgage lenders look for a history of on-time payments that tells them you can be trusted to pay your mortgage on time as well.

3: Don’t max your credit limits out
A part of your credit score is determined according to how much of your available credit you use each month. Utilizing all of your available credit may reflect negatively on your credit report as it can appear that you are relying too heavily on credit and may be more apt to fall further into debt.

4: Pay down your credit card and loan balances religiously

Mortgage lenders look for diligence when it comes to reducing your debt over time. Starting with a secured credit card that you pay completely each month tells lenders that you are capable of budgeting and planning your spending. Maintaining high loan balances that carry over from month to month demonstrates a habit of over-spending relative to your income.  If an unexpected expense leaves you with a high balance, it’s critical to consistently work toward paying down and eliminating the debt by paying more than the minimum required payment each month.

These tips can also work for people attempting to rebuild a damaged credit history. For younger adults aiming to become first-time homeowners, they’re essential to achieve success.

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Building strong credit