Building credit takes careful planning and due diligence to avoid unnecessary mistakes, like missed payments. Though it requires careful attention, it is not impossible. If your credit isn’t where you want it to be, you should evaluate your current status and develop a game plan if you plan on purchasing a home in the future (and even if you’re not, it’s good to know how to build your credit so that it works for you!)
One of the easiest ways to build credit is to use your credit card regularly and responsibly. Making your monthly payments on time and in full is positively reflected in your credit score. Every payment you make is reported to credit bureaus, regardless of whether you’ve made it on time or not. Paying each bill helps you build a positive credit profile, demonstrates that you’re capable of meeting a creditor’s conditions, and usually comes with some great perks! Though credit cards offer regular users rewards, like cash back, travel credits, and reward cards based on the user’s spending habits. They also give you the option to make large purchases upfront, which commonly leads many users to rack up debt fast. Credit card holders should be mindful of deadlines and late payment fees to avoid high spending.
Car Loans & Buying Pre-Owned
Introducing a car loan to your credit line helps diversify your credit profile and gives you the opportunity to boost your credit score.
Making each payment on time helps you build credit, however being late on just one payment can potentially negatively impact your credit score. Steady, reliable payments paint you as more trustworthy to lenders. Before you drive off the lot in a brand-new car, consider purchasing a pre-owned vehicle instead. Research shows cars depreciate by about 60% in just five years. In most cases, dealers offer extended warranties and special financing with the purchase of a pre-owned car.
Student loans are installment loans, which are a bit different than revolving credit, like credit cards.
Lenders offer these types of loans to users upfront, all at once, then require them to pay the amount back over a set period through regular installments. Car, mortgage, and home equity loans all fall into this category, but student loans are typically the first installment loans most people encounter.
Starting off your credit history with on-time student loan payments reflects positively on your credit score. Student loan borrowers can use their loans as a base to build up a good credit profile. If you do have student loans, be sure to always pay on time, and stick to a payment fee you can afford.
Buying a home is likely the biggest and most important purchase most people make in their lives.
A mortgage loan helps people build credit, as long as they make their payments routinely and on-time. Despite being the biggest debt, most people owe; mortgage loans are considered good debt. Your home is a physical asset backing the loan. If you miss a payment, the lender can repossess the home, meaning a mortgage is a relatively safe investment for them. Paying your mortgage will boost your score and show creditors you’re a trustworthy borrower. Applying for a mortgage will initially lower your credit score. The application will trigger a hard credit inquiry, which only temporarily lowers your credit score for about 45-days.
Slowly and steadily, you can build up your credit. It takes time, but it is not completely impossible. If you’re looking to purchase a home in the future, create a game plan and stick to it. Showing consistency and responsibility is a factor when Loan Officers consider when determining a home mortgage loan. If you need more information, contact one of Assurance Financials’ home loan experts today!
We’ve created these guides to be a valuable resource to walk you step-by-step through your next adventure.