To say that buying a house is a big financial commitment would be an incredible understatement. Deciding to buy a house or a second home in the mountains is the easy part. Actually reaching a point where a lender will help you finance this decision, now that’s hard work! Not only do you need to save up for a downpayment, but you also need two years of stable tax returns and a decent credit score to get your mortgage application approved. Much less to get a good interest rate. But how, exactly, does one build credit score and what impacts your credit score?
Building Your Credit Score
Most people think of their credit score as a personality test for their financial habits. While your credit score is a way to measure financial responsibility, it’s really only capable of measuring what you do on credit. This means that every great financial decision you make without involving a loan, debt, or credit card doesn’t register. For anyone out there wondering why your wise financial choices aren’t raising your credit score with a quickness, here’s the key: You have to use credit to raise your credit score. We know, it seems backward considering what credit score is used to judge, but here’s how it works –
1) The Right Credit Card for You
The first step is to find a credit card you really want to use. Look for one that offers rewards for shopping in places you shop and buying things that you buy. If you go out to restaurants, a travel card might be the thing. If you cook a lot, look for a grocery friendly card. If you can’t decide, go for a great cash-back deal. A small balance is okay, but get as large a line of credit as you can for good terms.
2) Spend Like Debit, Buy on Credit
Now buy everything on that card, but we don’t mean ‘go on a spending spree.’ Buy everything you would normally buy in a month on the card instead of through your debit. Then pay the card off completely at the end of the month.
Buy groceries with it, clothes, pay bills, whatever as long as you charge it up and fully pay it off every month. The trick is to never incur fees or interest by staying within the limit and always having it fully payed at the end of the month.
3) Pay Off Debts Faster Than Necessary
Now for your debts. Debts are like lead weights on your credit score because they are a steady negative. Paying debts, on the other hand, looks great to creditors and they love to see someone dedicated to repayment. The best way to raise your score is to pay more monthly on your debts than you need to and finish paying them off faster. This is especially easy for smaller debts and is a great alternative to saving even for bigger things like car or house. If you can, use some of your recreational spending to wipe out any small debts completely.
4) Hunt Down Old Debts
Not all debts are easy to pay back. Older debts may have gone into collections and been sold to scummy creditors with bad websites. However, there are resources to help you hunt down every detail affecting your credit score including these zombie debts. If you can, dig up these old debts and either have them wiped or pay them off. This will lighten the load that has been keeping your credit score down.
5) Acquire and Quickly Pay Loans
Finally, here’s an interesting tactic that very few people implement. You can absolutely get yourself a short-term loan and then pay it off to impact your credit score. What creditors want to see is that you can handle debts responsibly and can, therefore, be trusted with even bigger debts like car loans and mortgages. By taking out loans and paying them, you are creating a history of responsible use of credit, especially if you pay the loans back faster than necessary using our previous trick to impress the credit industry. You can buy tech, improve your home, or even use the loan for nothing and pay it back with the cash it dropped in your bank account.
Building your credit score isn’t hard, but it is a little bit complicated. Just remember that you have to spend and pay back credit in order to build this number and the task should be easy as pie. After just a few months of paying back debts and using your credit cards wisely, you should start to see that number rising. Depending on where you started, your credit could be ready for a pre-approved mortgage in as little as six months to a year. Soon enough, you’ll be making a bid on your first home.
Ready to find a new home?
Trelora real estate serves the Colorado Front Range, Summit County and Seattle Metro Area and our mission is simple: full service real estate for a fraction of the cost. When you hire a traditional agent to help you buy or sell your home, man cave or no, you pay that agent 3-6% of the home’s value.
When you hire Trelora, you pay one flat fee rather than a variable commission on the price of your home. You’ll also get best-in-class customer service. A team of expert agents who close hundreds of deals per year. And a proprietary technology platform that puts you in the driver’s seat and an average refund of $13,500 in Colorado and $18,000 in Seattle.
Brady Miller, CFA is Chief Executive Officer at Trelora, Inc. Brady joined Trelora in August, 2018 as Chief Financial Officer. He moved into his current role later that year and is responsible for all daily operations and growth of the broader real estate business. Prior to joining Trelora, Brady was Chief Financial Officer of Leeds West Groups which is one of the largest, and fastest growing automotive retailers in America. Brady managed their real estate portfolio, financing, human resources, and accounting. He earned a Charted from the CFA Institute in 2016 and holds a bachelor’s degree from the University of Colorado, Boulder where he majored in Finance and Real Estate.