Credit is a word that tends to sometimes have a negative connotation, but many components of credit are beneficial to you. This is especially true if you plan to purchase a home someday, as you’ll most likely want to take out a mortgage on a home, unless you plan to pay for it with cash.
Building good credit is essential for anything from applying for a credit card, renting a home, taking out a mortgage or even buying a car. As we enter March, which is Credit Education Month, now is a great time to do a deep dive into credit and understand why it’s so important for everyone. Read on for what you should know about credit.
What Is Credit?
In short, credit means receiving something of value at present while promising to pay for it later over time. In most cases, paying your debt back over time will include some type of finance charge by the lender, in the form of interest. Credit can provide the opportunity to have things that otherwise may be out of reach if they cannot be paid for in full. In general, credit comes in two forms: revolving and installment loans. Credit cards fall under revolving debt, while a mortgage or auto loan are considered installments.
What Is a Credit Score?
Everyone has a credit score, which is a measure of how creditworthy an individual is. Credit agencies keep track of your payment history, debt, the number of accounts open, and more to calculate a number, which becomes your credit score. The range is between 300-850, and the higher your score, the more creditworthy you look to a lender. Five factors impact your overall score:
- Payment History (35%) – Making payments on time is essential for building a high credit score
- Amount Owed (30%) – Credit utilization is a significant factor in determining your score, and ideally, it will be 30% or lower
- Length of Credit History (15%) – The longer your credit history, the better – this is one instance where student loans can be a benefit to you
- Credit Types (10%) – It’s important to have a diverse mix of revolving and installment credit
- New Credit (10%) – Hard credit inquiries can lower your score, so it’s important to limit credit applications unless necessary
Three primary credit reporting bureaus keep track of your credit and give you a score based on your history. You can access your scores for free annually from the credit bureaus, and many third-party websites offer insight into your credit background at no cost to you. One of the best places to start is to contact your C&F Mortgage loan officer.
How Can I Improve My Credit?
For many of us, there’s room for improvement when it comes to our credit score. It takes work to achieve excellent credit, but it’s not impossible. Here are a few things to note when it comes to working on your credit:
1. Make payments on time. As the most significant factor of your credit score, it’s critical to ensure you’re making timely payments on all of your accounts owed. If you have a hard time remembering deadlines, set a calendar reminder – or better yet, set up automatic payments!
2. Keep your utilization ratio low. It’s important to keep your utilization below 30%, but the lower the better in terms of building your score. Try to pay off your credit cards in full each month to keep this ratio as low as possible.
3. Keep some accounts open. Your credit history is an integral part of your score, so the longer you’ve had credit established, the better. If you have an older credit card that you’ve paid off, it’s sometimes better to keep it active by charging a small amount and paying it in full each month than it is to cancel the account.
4. Diversify your credit. Try not to put all of your eggs in one basket, so to speak. Don’t open up a handful of credit cards and call it a day – try to build your credit across multiple avenues, including a credit card, an auto loan, a personal loan, etc. Choose a few that work for you and focus on nurturing them.
5. Don’t open too many accounts at once. For example, it may be tempting to open up store credit cards to get a discount on your purchase but think about the long-term impacts. Not only do these hard credit inquiries negatively impact your score in the short term, but opening up too many lines of credit can tempt you to spend money you don’t necessarily have on hand. If you do plan to make a big purchase, such as a vehicle or a home, you won’t be penalized for shopping around, so long as all of the inquiries are made within a short period.
At C&F Mortgage, we’re focused on you every step of the way. Building good credit is the first step toward a successful homebuying experience, and our team is here to help you set goals and implement financial strategies that will help make homeownership a reality for you. Get in touch with us today to get started.