New Year, New Credit

What is Credit? And How to Build it.

With the new year comes many New Year’s resolutions. Many people set a New Year’s Resolution to purchase a house. But to be able to achieve this, a person needs adequate credit to qualify for a mortgage. Here is a helpful guide on what credit is and how to build it.

What is a credit score? A credit score is a three-digit number ranging from 200-850. This number reflects your “risk” to a loan or credit card provider. In other words, it is how likely you are to pay off a loan or line of credit; the higher the number, the more likely you are to pay, at least in the eyes of the bank.

A few different ways to find your current credit score:

• Purchase your scores from one of the three major credit reporting agencies: Equifax, Experian, or TransUnion.
• Certain credit or loan statements will provide an approximate score.
• Access a free report of your TransUnion and Equifax scores from Credit Karma.
• Set up a HomeFreeUSA Experian Credit Center account to set up a credit-building plan.
• Receive a free annual copy of your full credit report here.

Your credit score is determined by 6 key factors. The weights of these factors depend on the credit reporting agency:

1. Number of Accounts Open
2. Types of Account
3. Credit Usage
4. Length of Credit History
5. Payment History
6. Hard Inquiries

For a more in-depth understanding of how each factor is calculated, check out these resources from myFICO, Equifax, and the CFPB. We’ll go into more detail about how to build your credit later in this blog.

But why does any of this matter? How do these scores impact my eligibility to purchase a house? When applying for a house, your score will determine whether you are eligible for certain home loans and mortgages, as well as the interest rates, fees, and required down payment. A higher credit score will increase your chances of getting approved for a mortgage. It will help secure good mortgage rates, which will save you thousands over the life of the mortgage. The difference between a 4% and 6% interest rate on a 30-year mortgage for $180,000 is the difference between $859/month compared to $1,079 a month. That’s a $220 per month difference! A lower credit score, on the other hand, will reduce your ability to get mortgages at good rates and may disqualify you from certain down-payment assistance programs like Philly First or Neighborhood LIFT.

For a better understanding of where you currently stand with your credit score, here’s a credit score breakdown:

• 300-579: Very high-risk borrower. Unlikely to qualify for a home loan, making it difficult to secure financing for home-ownership.
• 580-639: Possible approval, but expect high interest rates and fees, especially for conventional loans.
• 640-699: Qualified for a home loan, but not the best mortgage rates available.
• 700-749: Strong borrower with access to good interest rates and more home loan options.
• 750-850: Excellent credit and minimal risk borrower. Likely to qualify for the lowest available interest rates with minimal down payments.

So, how can you build or repair your credit if you want to purchase a home?

• Use no more than 10%-30% of your overall credit limit.
• Build history by keeping your oldest accounts open, even if you do not use them
• Do not use your credit card if you don’t already have the money to pay for it.
• Make sure you ALWAYS pay at least your minimum credit card and any loan payments (like a car note) on time.
• Do not apply for multiple credit cards or personal loans in a short time period. You want to reduce the amount of hard inquiries on your credit, which bring down your score.
• Check your credit report regularly.
• Add your monthly bills to your Experian Credit report.
• Check your report for errors and report them

Stay away from credit repair companies! These companies will take your money to deal with collections, which is something you can do yourself for free! A housing counselor can help you with this for free.

If you don’t have any form of credit history, building it will require some specific steps:

• Apply for a secure credit card. These cards involve you paying a deposit for a line of credit, which, once you’ve proven that you can pay bills on time, will become a regular credit card.
• Become an authorized user on someone else’s credit card or loan.
• Take out a small personal loan of $100-$300 and set it up for automatic payments to build payment history and credit while maintaining a very low monthly payment.

The process of building your credit is daunting and may take some sacrifices, but do not let some of the challenges dissuade you from working to purchase your own house. Old habits die hard and will try to creep back in. But you don’t go running back into a burning house just because it’s cold outside! With hard work and perseverance, you can build up your credit and make homeownership a reality!