Having a solid score not only increases the chances of getting approved for a loan, but can also lower the interest rate and monthly payments. In this article, we will discuss the basics of building good credit and the steps you can take to start working towards an FHA loan.
Credit reports are based on past and current financial behavior. They help lenders determine whether someone is likely to make prompt payments on a loan. Credit reports are made up of information from banks, credit card companies, and other lenders that have extended credit to the individual. This includes a history of payments, balances, and types of credit accounts. Potential borrowers will need to show lenders that they are capable of making regular payments on time.
When building up credit, it’s important to focus on the three main aspects that make up your credit score. These include payment history, credit utilization, and credit age. Payment history is the most critical factor, and it measures how often you make payments on time. To maximize your score in this area, you should aim to pay your credit card and loan bills on time every month. Late payments can have a negative impact on your scores.
The next factor is credit utilization, which is the amount of debt versus the available credit. This is typically calculated as a percentage, so if you have a $2,000 limit on a credit card and your balance is $500, your utilization would be 25%. The ideal credit utilization ratio is below 30%, so try to keep your balances low.
Finally, credit age is the length of time that you have been using credit. Generally speaking, the longer your credit history, the better. Having several years of a good credit history can help to boost your credit score.
For those who have little to no credit history, or who want to improve their current score, there are some steps that can be taken to begin building credit. The first step is to start using credit in a responsible manner. This could mean applying for a secured credit card, taking out a small loan from a credit union, or even having a trusted family member add you as an authorized user on one of their accounts. Another option is to make regular payments on existing accounts, such as utility bills or rent, which can help to establish a positive credit history.
It’s important to remember that building credit takes time, and progress may be slow. Making regular payments on time, keeping debt levels low, and monitoring credit reports are all important steps for anyone looking to increase their score. Doing the above can help improve chances of being approved for an FHA home loan when the time comes.
In summary, building good credit before applying for an FHA home loan is a vital step for anyone considering homeownership. Credit reports are based on past and current financial behavior, and three key components make up the score: payment history, credit utilization, and credit age. For those with little to no history, opening secured credit cards or having a trusted family member add them as an authorized user are ways to get started. Additionally, making regular payments on existing accounts can help build up a good credit history. While progress may be slow, regularly monitoring credit reports and paying bills on time will be beneficial in the long run.
This article was contributed on Dec 10, 2023
