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How to Build Credit to Buy a House (and not a Nissan)

“Where your job is your credit”

Big Boy from Power 106 (where hip hop lives)

If you lived in Los Angeles in the 90s, you KNOW this quote. I remember hearing Big Boy close out every Universal City Nissan radio ad with this classic line SO many times, it formed my entire young adult understanding of credit. 

Job=credit. If I have a job, I have credit. Any job, right? Obviously.

Which was perfect cause I had a job and I desperately wanted a Nissan Sentra.

Unfortunately for us young, bright-eyed and hopeful nineties kids, the “your job is your credit” thing didn’t apply to buying a home. 

When getting a mortgage, “your credit is YOUR CREDIT”. 

But not all hope is lost if you are starting your credit journey from scratch…ideally cruising in a brand new Sentra courtesy of Uni-Ver-Sal City NISSAAAAAN ♫♪ 

Why Your Credit Score is Important to Lenders

Lenders use your credit score to determine whether or not you are “a good risk.” For example, if you want to borrow money to buy real estate, they will examine the property to assess whether it’s a good investment, and they’ll look at your credit history. They want to know if you make enough money to cover your debts and whether or not you use that money wisely. They REALLY want to see whether you’ll pay back the money you hope to borrow from them.

Your credit score (or lack thereof) may affect your ability to get a loan approved, the amount of money you can borrow, and the interest rate your lender offers.

So, What IS a Credit Score?

There are three credit reporting agencies in the U.S. – Equifax, Experian, and TransUnion. Whenever you use credit to shop, the companies inform at least one of these agencies, who then keep records of how much credit you are using and how often you are making payments, and assign you a credit score that ranges from 300 to 850.

There are various ways to calculate credit scores, and different lenders might use the information from these agencies in different ways. Generally, the better decisions you make with credit, the higher your score will be. All of the calculation models look at a variety of factors. These include:

  • The number of tradelines you have open – Generally, lenders like to see at least three credit accounts.
  • The types of credit you have – Examples include credit cards, lines of credit, auto loans, and student loans. They like to see more than one type.
  • How much of your available credit you are using – Definitely, resist the urge to MAX all your cards! Keep the balances low.
  • How long you’ve had credit – Keep your oldest credit card active and try not to apply for several new products, as this affects the average age of your accounts.
  • Your payment history – Pay your bills on time, every time! Missed payments will stay on your record for years.

If you’ve never borrowed money for purchases (or you haven’t borrowed enough), there might not be enough information on your file to calculate a credit score.

How Do You Build Credit, Anyway?

If you’re simply new at borrowing, you’re in a better position than someone who has made mistakes with money. You don’t need to “fix” your credit history. Instead, you need to build it. This is a relatively easy thing to do, but it does take some time. Here are a few things that can help you build your credit from scratch:

  • Apply for a credit card or a line of credit – You may be able to open your own account with a small credit limit. If not, start with a secured card or ask someone to co-sign for you. If you’re worried about the hard pull to your credit, which can affect your credit score slightly, search for prequalified offers. 
  • Use your credit – That might seem obvious, but not everyone realizes that lenders want to see you USING your credit product AND paying it off, even if you only fill up your gas tank once a month. Try to use credit only if you have the cash to pay it off.
  • Wait for your statement – If you’re great with money, you might be tempted to go home and make a payment after making a purchase, but that’s not the best thing to do when you’re trying to build credit. Instead, wait until you get your statement. Otherwise, the purchase might not be reported to the credit agencies.
  • Become an authorized user on another person’s card – Ask your spouse or parent to add you to their account as a cardholder. This strategy will work best if the primary account holder has a perfect payment record, a high limit, and long account history.
  • Take out a SMALL loan – A secured loan, a credit-builder, or a co-signed loan can help you demonstrate your creditworthiness. However, make sure your loan won’t take a large portion of your income to pay down, which would negatively impact your score.
  • Keep on top of all your expenses – Telephone companies report to credit agencies, so make sure your contract is up-to-date and paid on time. In some cases, you may also be able to use rent and utility payments to build credit.

Keep on Top of Your Credit History

It’s essential to keep tabs on your credit history, not just for borrowing but to watch out for errors and catch identity theft before it’s too late.

Federal law allows you to check your credit reports annually, at the three main credit bureaus, at no charge. And don’t worry, checking your records yourself won’t hurt your credit score.

Manage Your Credit Wisely

Once you have credit products in place, you’ll need to keep them in good standing. Of course, it’s always wise to create a detailed monthly budget and stick to it. Keep your payments current and limit applications for new credit.

When you manage your credit wisely, you’ll increase your credit score, and lenders will have faith in you. In addition, as your credit score increases, you’ll be able to take advantage of offers they make to low-risk customers. That means the more you grow (and use) your credit wisely, the easier it will be to acquire more, at better rates than where you started. Allowing you to finance the big purchases you’ve always dreamed of.