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The best way to build up your credit score before buying a house

By Taylor Medine

July 2021

When you’re planning to buy a house, your credit scores are 3-digit numbers that can have a big impact. Your credit scores are a grade of what’s on your credit reports, and they tell lenders how creditworthy you are. 

The credit score you need to buy a house can vary depending on the type of mortgage you use. Conventional loans typically require a score of at least 620, but you may be able to qualify for an FHA loan with a lower credit score.

If you plan to buy a home, getting to work on building credit sooner than later could help you qualify for the home of your dreams at a potentially lower interest rate. Here are tips on the best ways to build up your credit score before buying. 

1. Pull your credit reports and scores

The first step for building credit is pulling your credit reports to see where you stand. You can get one free credit report per year from all 3 credit bureaus — Experian, Equifax, and TransUnion. And don’t worry — pulling your own credit doesn’t affect your score.

How to check your credit score

Free credit reports don’t usually come with credit scores, but you may be able to get your credit score for free through your bank or credit card company. 

If that’s not an option, you could pay to get your FICO® Score directly from myFICO.com, or you could get your credit score for free from one of several free credit reporting sites.

Just keep in mind that your free credit score from a credit reporting website may not be the credit score type the lender views when determining if you qualify for a mortgage. 

That’s because there are different types of credit scoring models; some free sites use the VantageScore® scoring model, while lenders commonly use the FICO scoring model to determine creditworthiness.  

2. Dispute incorrect records

The next step for building credit is making sure the information on your credit report is correct. 

This might surprise you — it’s not uncommon for errors to pop up. And the last thing you want is for missed payments or other records that don’t belong to you hurting your score. 

Under the Fair Credit Reporting Act (FCRA), you have a right to dispute records, and credit reporting agencies get about 30 days to correct unverifiable information.

In your dispute package, the FTC recommends sending any dispute forms the credit bureau might give you along with documents that support your case. Having negative records on your report that are incorrect removed could help improve your score. 

3. Keep up with all payments

After making sure your credit reports are accurate, establishing a record of on-time payments on credit accounts is an essential step of building credit since payment history has the most influence on your credit scores

Let’s face it — keeping track of multiple bills for credit cards and loans can be a lot to remember. Setting up auto-payments or payment reminders could help ensure you never miss a payment.

If you already have missed payments on your credit reports, the good news is they won’t stick around forever. Late payments usually stay on your report for up to 7 years. 

Late payments may also have less of an influence on your score as time passes if you begin replacing them with positive history. This is why it’s so crucial to pay on time moving forward. 

4. Try to pay down your debt

Another influential part of your credit score is your credit utilization, which is a ratio that shows how much of your credit limits you’re using. 

Here's how credit utilization is calculated:

  1. Add up your total credit card balances
  2. Add up your total credit card limits
  3. Divide your total credit card balances by the total credit card limits
  4. Multiply by 100

For example, if the total balances on all of your credit cards is $4,000 and your credit limits total $6,000, your utilization would be about 67%. The lower your utilization, the better. Paying off debt to lower this percentage could positively affect your credit. 

Whether you should draw from savings to pay down debt depends on personal preference and your situation — especially ahead of a home purchase, which requires at least some savings for upfront expenses like a down payment and closing costs. 

Instead of pulling from savings, you could try to make extra card payments per month or put money from a tax return, bonus, or commission toward debt to help pay down the balance.

 

Traditional ways of building credit from scratch

To build credit, you need to show creditors you can use credit responsibly. If your credit report has few (or no) accounts, opening up a new account could help you establish payment history.

Although, there is one caveat to this: Applying for new credit often involves a credit check, which is typically not advised right before buying a home because it can dock your score some points. 

However, if you plan to buy in the next few years instead of the next few months, it could be worthwhile to apply for new credit. Here are a few products you could consider if you’re building credit from scratch or trying to bounce back from bad credit:

  • Secured credit cards: Secured cards require a deposit upfront that typically acts as your credit line, and this makes them easier to qualify for. Making on-time payments on secured cards can help you establish positive payment history, and you may be able to get your deposit back after a certain amount of time.
  • Credit builder loans: Credit builder loans are installment loans where you don’t get the cash up front. Instead, it’s put into a separate savings account until you pay off the loan with monthly payments. Payments are reported to the credit bureaus to help you build payment history, and the lump sum is given to you at the end of the loan term. Self is an example of a company that offers credit builder loans, and you may be able to get them from credit unions as well.
  • Credit builder cards: Chime is an example of a company that offers credit builder credit cards without a credit check. You deposit money into a Credit Builder account, and this is the amount you can spend on your card. Payments are also reported to credit bureaus.

An alternative way to build credit from scratch

An alternative way to build credit could be to become an authorized user on someone’s account with great payment habits. As an authorized user, their account and on-time card payments may also appear on your credit report, which could help you establish payment history before you apply for a card or loan. You could do this with a parent, partner, spouse, or family member.

Before becoming an authorized user, find out if the card company reports payments to credit bureaus for authorized users. If payments are not reported, they won’t appear on your credit report, which would defeat the purpose of this technique.

Also, you want to trust that the primary cardholder will continue making on-time payments because their missed payments could also show up on your credit report.

The bottom line

Your credit is an important factor a lender considers when determining if you qualify for a mortgage loan. The good news is that having less-than-stellar credit or limited credit history doesn’t necessarily mean homeownership is out of reach forever. 

Good credit is something you can build, but it may take some time. Taking steps toward building credit today could help you buy the home of your dreams tomorrow.

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Taylor Medine is a personal finance writer who has covered money topics for various media outlets over the past 7 years. Her work has been published on USA Today, Business Insider, MSN, Yahoo! and more. When she’s not writing, you’ll likely find her attempting (and possibly failing at) a new recipe or chasing after her 1-year-old daughter, Elise.
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