So you’ve committed to the idea of buying a home, but there’s one little caveat: you have no credit history! Maybe you were always told to avoid credit cards, or you simply never got around to applying for one. You’re probably aware that credit is a fundamental factor when securing a home loan and getting an attractive interest rate. So what can you do? Here are some smart ways to establish credit from ground zero, and do it quickly.
Get a Secured Credit Card
This is a wise first step, particularly if you have no credit whatsoever. With a secured credit card, you’re given a credit limit just like a regular credit card, but you must put down a cash deposit up front, typically for the same amount as your credit limit. This may sound like a debit card, but here’s the difference: the activity on the card gets reported to the credit bureaus, and that’s a very good thing when you want to build credit.
Secured cards aren’t intended to be used forever, though. Their main purpose is to build enough credit to qualify for an unsecured card—one that doesn’t require a deposit. Make sure the secured card you choose reports to all three credit bureaus: Equifax, Experian, and TransUnion.
Always Pay Your Bills on Time
Promptly paying your bills is the single most important factor in achieving a good credit score. According to MyFico.com, the biggest influence in determining your score is your payment history, making up 35% of your overall score. This goes for all bills, not just credit cards. Whether it’s a car payment, cell phone bill, or utilities, late payments—even those just several weeks overdue—can be submitted to a collection agency, which negatively impacts your credit score.
Don’t Get Spend Happy
Once you open an unsecured credit card and begin building credit, you’ll need to demonstrate you’re able to use it responsibly. The ticket to establishing credit is NOT to use as much as your credit limit allows. Your goal is what is known as a “low credit utilization ratio”, which compares the amount of credit used to the total credit available. To build a good score, the rule of thumb is to keep your credit utilization ratio below 30 percent. So for a credit card with a $5,000 limit, it’s wise to charge no more than $1,500 and don’t get into the routine of charging more than you can pay in full every month.
Keep Tabs on Your Credit Report
By law, you’re entitled to one free credit report a year. So take advantage of it! Your credit report provides a detailed account of your financial history, specific to how you repay borrowed money (credit cards, car loans, student loans, etc.). When examining your report, ensure there are no inaccuracies. These may include identity errors, incorrect account information, or worse--a fraudulent account, which can seriously damage your score without your knowledge. So if you see something suspicious, report it.
Your credit score typically isn’t included in your free credit report, though. In most cases, you’ll have to pay a fee to obtain your score, although some banks have begun offering them to consumers for free.
Remember, building credit is a critical piece in reaching your financial, and perhaps even personal, goals. A solid credit history can assist you in getting a credit card, a car, or one of the biggest purchases you will likely ever make: your own home. So take it seriously, and use these tips to effectively and quickly build credit.
Already have established credit, but unhappy with your score? Here are the 5 Fastest Ways to Boost Your Credit Score.
Ditech is not a financial advisor and the ideas outlined above are for informational purposes only. They are not intended as investment or financial advice and should not be construed as such. Consult a financial advisor before making decisions regarding important personal financial matters, and consult a tax advisor regarding the deductibility of interest.