Mark Uppendahl's Blog
What do buying a house, opening a credit card, and getting approved for an auto loan have in common? They all depend on your credit score.
Building credit is a multifaceted undertaking. In a way, this is a good thing--you wouldn’t want lenders to base their opinions solely on one aspect of your financial history. The downside is that understanding just what makes up your credit score can be difficult.
To complicate matters further, there isn’t one standard method for scoring your credit, and different credit bureaus each use their own criteria.
In this article, we’re going to talk about some of the factors the major credit bureaus use to calculate your credit, and give you some ways you can boost your credit.
But first, let’s talk about some of the implications of having a good credit score.
Why credit matters
Typical credit scores range anywhere from 250 to 850. The three main reporting agencies (Equifax, TransUnion, and Experian). Most lenders use a combination of those scores that is reported by FICO.
Most credit reports will rank your category from “bad” to “excellent.” Here’s an example of what a credit ranking might look like:
Good: 700 - 749
Fair: 650 - 659
Poor: 550 - 649
U.S. legislation makes it possible for Americans to receive a free report of their credit score and to challenge and correct the score if it contains inaccuracies.
If you’re thinking about buying a house, opening a new line of credit, or taking out a loan of some kind, then the provider will likely run your credit score. Those providers are going to want to see a return on their investment, so they’ll charge interest.
If you have a high credit score, it tells the lenders that you are a low-risk investment, and therefore they can offer you a lower interest rate, saving you money in the long run.
Components of a credit score
There are five main factors that credit bureaus take into consideration when formulating your credit score. Not all of the factors are treated equally. Your ability to pay your bills on time, for example, is considered to be more important than the types of bills you have. Here’s a breakdown of the five components that make up a credit score:
35% - Bill and loan payments
30% - Current total amount of debt
15% - Amount of time you’ve had credit (since you took out your first loan or opened your first credit card)
10% - Types of credit (cards, loans, etc.)
10 % - New credit inquiries
Quick tips for building credit
It takes time to build credit and improve your score. So, if you’re hoping to buy a home within the next few years, now is the time to start working on your credit. Here are some best practices for building credit:
Set up autopay for your bills to avoid late payments. Even if the service doesn’t offer autopay, you can likely set up recurring payments through your bank.
Settle outstanding debt. Avoiding debt that you can’t pay off will only hurt you more in the long run. Call your creditor and see if they offer debt relief programs. More likely than not they’d rather work with you to ensure they receive some repayment rather than none at all.
Start budgeting the right way. New budgeting software like Mint and “You Need a Budget” are easy to use and link up with your accounts. They’ll help you monitor your spending and start paying off debt.
Don’t open new lines of credit close to when you want to take out a loan. New credit inquiries can briefly lower your credit, especially if you make more than one. Viewing your free credit reports doesn’t count as an inquiry, so feel free to do that as often as needed to check your progress.
Get credit for bills you’re already paying. You can report your monthly rent payments, switch bills into your name that you contribute to, or take out a credit builder loan. All three will help you build rent without changing your spending habits.
Being a first-time home buyer is tough. It can seem like you have undertaken one of the most overwhelming processes ever. There’s so much to learn in the process of securing a mortgage and closing on a home. If you go into buying a home prepared with knowledge, it will be that much easier for you.
There’s a lot of terminology to learn about the home buying process. You’ll need to know who should be involved with the transaction including agents, lawyers and bankers. You’ll need to be prepared for the fees involved in buying a home as well. There are many different programs available to help first-time homebuyers that can help you save money and secure your first home. Here’s just some of those programs:
This is the Federal Housing Administration and it’s a very popular go-to for first-time home buyers. It’s also great for people who have tarnished credit history. As a borrower with FHA backing, you can qualify for a loan with as little as 3.5% down. These FHA loans have an additional cost built into them which is mortgage insurance. In case you default on the loan, this protects the lender.
The Department Of Veteran’s Affairs
This resource helps veterans, service members and their surviving spouses to buy homes. Often, this program requires no down payment or mortgage insurance. The problem is that getting these kinds of loans can take awhile to process, so you can’t be in a big hurry to buy a home.
Good Neighbor Next Door
This program is meant for teachers, law enforcement, firefighters and emergency medical responders, which is why it’s called the “Good Neighbor” initiative. This is a program sponsored as part of the Department of Housing and Urban Development. It allows 50% discounts of the price of homes in places considered revitalization areas. All you need to do is be in one of the said professions and commit to living on the property for at least 3 years. The catch is that these homes are listed for just 7 days on the Good Neighbor Next Door website.
Fannie Mae and Freddie Mac
These are government-sanctioned companies that work with local lenders to offer good mortgage options for first-time home buyers such as 3% down payment options.
The U.S Department of Agriculture has its own homebuyers’ assistance program. The benefits are for people who live in rural areas and allows 100% financing by offering lenders mortgage guarantees in return. There are income limitations that can vary by region.
Assistance Isn’t Hard To Find
As you can see, there are many programs available to help first-time homebuyers. From downpayment assistance to ways that you can keep your mortgage payments low, you can find some help if you need it. You may feel that purchasing a home is something that’s far in the future the future, but with federal programs, more people can realize their dreams of home ownership.
Stronger economic indicators can lead to more jobs, higher wages and house building expansion. A stronger economy can also lead to interest rate spikes. Inflation is another change to watch for as the economy strengthens.
Economic growth could cause your mortgage payments to balloon
Both rising interest rates and inflation can have an impact on your monthly mortgage payments. Inflation's impact on mortgages may be second hand, especially considering that inflation is generally caused by an increase in consumer spending.
Inflation is created when consumer demand outpaces supply. To offset the difference, retailers might increase the costs of goods. As the cost of goods rises, consumers may have less disposable income to turn to in order to pay their bills, including their mortgage.
Another element that can cause prices to rise is the cost of items like fuel and technology. For example, rising fuel costs can cause public transportation and shipping costs to go up. When this happens, prices on material goods may spike.
Dance between interest rates and residential mortgages
Interest rates have a more direct impact on mortgages. First time home buyers may have no choice but to pay higher monthly mortgages if interest rates go up. Because rising interest rates are generally viewed as favorable by lenders, rising interest rates could also spell larger opportunities for home shoppers to secure a mortgage.
Additionally, interest rates can significantly impact monthly mortgage levels for homeowners with an adjustable rate mortgage. It was this upward shift that had a negative impact on people who bought an owned houses just prior to the kickoff of the Great Recession. Anyone who has experienced an increase in her credit card interest rates knows how much rising interest rates can impact a monthly expense.
This is one of the downsides of rising interest rates for homeowners. Not only might homeowners see their monthly mortgage rise after interest rates go up, homeowners also might see their credit card bills go up.
Fortunately, there are steps that homeowners could take to offset both inflation and rising interest rates. Signing a low to moderate fixed mortgage is a good first start, if interest rates on the fixed mortgage are at competitive levels. That way, should interest rates rise, homeowners won't have to worry that their monthly mortgages will loom larger. They can also manage a more stable budget and better know where they stand financially should an unexpected event like a medical issue or a house repair arise.
Building cash reserves is another way that homeowners can offset inflation and rising interest rates. To take the jolt out of building cash reserves, homeowners can start small. For example, homeowners could start by depositing a quarter of their income tax returns into a separate, interest bearing account.
They could also use bonus checks and a portion of their commissions (for homeowners who work in sales) as cash reserves. The point is to keep building the savings. Eventually, the cash reserves might be used to purchase a new house or to make upgrades at a current home.