Most people do not have the resources to buy a home outright. This is even truer for first-time home buyers. They do not have the advantage of selling a home and using the profit towards the purchase of a new home. Therefore, they will be more dependent on credit to help them finance the purchase of a home. Consequently, they will need a good credit report in order to qualify for the loan they need to purchase a home. Building a good credit rating is not difficult. The five suggestions below will help individuals who are looking to purchase a home build the credit they need to buy their first home.
One term individuals will hear when building credit is to have a favorable credit ratio. This is simply a ratio of how much credit you have compared to how much you have debt you have. It is recommended to have debt to credit ratio below 30%.
Therefore, if an individual has a credit card with a $1000 limit they will want to keep their debt below $300. Creditors like to see this because it shows the person is responsible in managing their debt, and does not make a practice of maxing out their credit. A maxed-out credit card can be a red flag to lenders because it shows them an individual has placed themselves in a difficult situation. It has been shown that having a good ratio of debt to credit can count almost one-third towards a favorable credit score.
Many people wonder about the benefits of lowering their credit limit. They believe that by doing this it will be less tempting to use it and creditors will look favorably at this. However, by doing the math one can see that it has the opposite consequence. Using the example above, if the credit card holder requests their credit limit be lowered to $500 they will then have a debt to credit ratio of 60%. At the other end of the spectrum, raising the credit limit can lower the ratio because an individual is increasing the credit limit while maintaining the current debt. However, raising the credit limit can bring new temptations because people will now see the ability to buy more extravagant items on credit.
This leads to the third point when building credit. Individuals should only take loans out for the amount they need. Borrowing more than necessary increases the difficulty to repay the loan and raises the possibility of default and late payments. These can affect the credit rating in a negative manner. It may be tempting to borrow more to have extra spending money, but the negative possibilities outweigh the benefits of doing this.
The next tip for building credit can meet with some resistance for good reason. Keeping a balance on a credit card can positively impact a credit rating, but should be done so with caution. It largely depends on the person’s financial situation. It is a good idea for a person that is building credit, is secure financially, and is responsible with debt. However, it is not a good idea for a person who has too much debt and is having a difficult time managing the debt. In the end, it is never a bad idea to pay off a credit card.
Obviously paying bills in a timely manner is a must. However, paying them on time is expected and does not necessarily have a positive impact on a credit rating. On the other hand, paying them late can negatively impact the credit rating. Having late payments on utilities, rent and similar bills can go onto the credit report and stay there for a long time for potential creditors to see.
Buying a home for the first time can be a challenging proposition for most people. Without the proper credit rating, buying a new home can be nearly impossible. The suggestions outlined above will help any new home buyer get the financing they need to secure their first home.