As a first-time home buyer, you will receive plenty of advice, especially about credit building. Having good credit is crucial for securing a mortgage with favorable terms.
Listening to misinformation about credit building can significantly affect your financial well-being. Misguided advice, even if well-intentioned, can potentially lower your credit score and cause difficulty securing a mortgage.
Let me help you separate fact from fiction.
Myth 1: To build credit, you must use lots of it!
Sure, using credit is essential for building a credit history, but more isn’t always better. Credit utilization, the amount of credit you use, plays a significant role in your credit score. High credit card balances can negatively impact your credit score, so paying as much as possible on your monthly bills is best.
Myth 2: Close your credit cards once you pay them off.
Closing a credit card after paying it off might seem like a smart move for credit building, but it’s not the best idea. Your debt-to-credit utilization ratio, the amount of overall credit you have versus the amount you use, can be affected. The length of your credit history also contributes to your credit score, and closing old accounts can hurt it. Instead, keep those accounts open, use them occasionally, and always pay off the balance whenever possible.
Myth 3: The occasional late or missed payment is no big deal.
Paying your bills on time is crucial for building a good credit score. Late or missed payments have a substantial impact. Your payment history information accounts for 35% of your credit score. Late payments will certainly affect credit building. Managing your credit responsibly is essential, demonstrating that you can handle your financial commitments, including your potential mortgage payments.
Myth 4: Boost your credit score by adding your spouse to your accounts.
While having a spouse with excellent credit can be beneficial for credit building, simply adding them to your accounts won’t raise your credit score. Credit scores are individual, but when you apply for credit together, lenders may consider both to determine your creditworthiness as a team. It can help you get a loan with favorable terms over time.
Myth 5: You should constantly check your credit report.
Checking your credit report regularly is a good practice for credit building, but you don’t need to do it daily. You can obtain a free credit report from the major reporting agencies once a year. Before applying for a mortgage, checking it every three to six months is sufficient to ensure no errors on your report.
Myth 6: Getting a credit report will lower your score.
The good news is that checking your credit report is considered a soft inquiry and won’t affect your credit score. However, applying for new credit cards or mortgages results in hard inquiries, which can temporarily lower your score. Avoid applying for new credit at least six months before your mortgage application to maintain the best possible credit score.
Myth 7: You must hire a credit repair agency to clean up your credit.
Credit repair agencies may promise to fix your credit, but you can do it yourself without paying any fees. Checking your credit report for errors and practicing good credit management are the most legitimate ways to enhance credit building.
When buying a home, having good credit is essential to securing a mortgage with favorable terms. Practice responsible credit management, pay your bills on time, and monitor your credit report for discrepancies.
If you’re considering buying or selling a home in the Palm Springs area, don’t hesitate to contact me, Stephen Burchard, The Desert Bowtie Realtor®, taking the (k)nots out of real estate.
