How to Build Credit

Building a credit score is crucial in the years leading up to buying a home. If you’ve never opened a credit card or taken out a loan, you might have zero credit, which can make it difficult for a lender to assess your reliability as a borrower. Without a credit history, getting approved for a loan may be challenging. If you're just starting to build your credit, here's a guide to help you get on track. What Is a Credit Score? Your credit score is a number that reflects your creditworthiness, essentially how likely you are to repay borrowed money. Lenders use this score to evaluate you when you apply for a mortgage, car loan, or credit card. Credit scores range from 300 to 850, with a higher score indicating better creditworthiness. The three major credit bureaus—Equifax, Experian, and TransUnion—track your credit activity and assign a score based on several factors: Payment history (35% of your score): Whether you’ve made payments on time. Credit utilization (30%): The percentage of your available credit you're using. Credit history length (15%): How long you’ve had credit. Credit mix (10%): The types of credit you have (e.g., credit cards, loans). New credit activity (10%): How often you've opened new accounts or requested credit. Steps to Build Credit Follow these tips if you’re just starting to establish your credit history. If you already have credit and want to improve your score, these strategies can still help. 1. Open a Secured Credit Card A secured credit card is a great way to begin building credit. You deposit a certain amount of money, which becomes your credit limit. For example, if you deposit $500, that’s the most you can spend on the card. You’ll need to make regular payments to restore your available credit. Secured cards report your activity to the credit bureaus, so on-time payments help build your credit history. Another option is to ask someone with established credit to co-sign for a credit card. Just remember that missed payments on either party's part can affect both credit scores. 2. Become an Authorized User If someone with good credit (like a family member) adds you as an authorized user on their credit card, you can benefit from their positive payment history. Keep in mind that while this helps establish credit, relying on someone else's credit profile won’t give you the independence lenders look for when you apply for your own loan. 3. Keep Your Balance Low Aim to use less than 30% of your available credit each month, as credit utilization makes up 30% of your score. Ideally, pay off your balance in full each month. If necessary, make several smaller payments throughout the month to keep your balance low. 4. Set Up Automatic Bill Payments Many service providers report payment history to the credit bureaus, so paying bills on time—such as for utilities or a phone plan—can help build credit. Set up automatic payments to avoid missing due dates. 5. Request a Credit Limit Increase Once you’ve used your credit responsibly for a few months, consider asking your credit card issuer for a credit limit increase. This helps lower your credit utilization ratio. Be sure to confirm that your request won’t trigger a hard inquiry on your credit report, which can temporarily lower your score. 6. Maintain a Savings Account Having a savings account can prevent you from relying on credit in emergencies, helping you avoid high utilization rates. It also looks good to lenders when applying for larger loans in the future. 7. Open a Second Credit Account Once you've built up some credit history, you might consider opening another account to diversify your credit mix. But wait at least two months before applying for a new card to allow your credit score to reflect your current account. Whether you opt for another credit card or a loan, having different types of credit can positively impact your score. 8. Use Free Credit Reporting Tools Some bills, like rent or subscription services, don’t always appear on your credit report. However, there are tools like Experian Boost or UltraFico that allow you to add these on-time payments to your report to boost your score. 9. Monitor Your Credit Regularly Check your credit report regularly to catch any errors or signs of fraud. You’re entitled to one free report each year from each credit bureau via AnnualCreditReport.com. Look for inaccuracies or unexpected changes, and dispute any errors to protect your score. 10. Keep Credit Accounts Open Length of credit history is a major factor in your score, so try not to close credit accounts, even if you don’t use them. Keeping old accounts open boosts your credit age and helps your score. If a card has high fees, consider upgrading it to a better one instead of closing it. Why Is Establishing Credit Important? A good credit history makes it easier to qualify for a mortgage, car loan, or credit card. The better your score, the lower your interest rates will likely be, saving you money over the life of the loan. How Long Does It Take to Build Credit? It usually takes three to six months of credit activity for the bureaus to generate a score. About 35% of your score is based on your payment history, so timely payments over a few months will help build your credit. The Fastest Way to Start Building Credit Opening a secured credit card and being added as an authorized user on an account with a good payment history are two of the quickest ways to build credit. These actions, combined with responsible credit use, can help establish a solid credit score within a few months.

How Are Mortgage Rates Determined?

When you check with a lender, you’ll see advertised mortgage rates. But will you qualify for those rates? It all comes down to risk—the higher the risk for the lender, the higher the interest rate you’ll pay. Lenders base your mortgage interest rate on several factors—some you can control, and others you can’t. Understanding why rates vary and how even a small increase can add up over the life of your loan is important. The good news is that mortgage rates can be negotiable, so it’s worth comparing rates from different lenders to find the best deal. What Factors Determine Interest Rates? Credit Score:Your credit score is one of the biggest factors in determining your rate. Generally, the higher your score, the better rate you’ll get. Lenders use FICO scores, which range from 300 to 850. A score above 720 is often the cutoff for getting better rates without adjustments, but you may get even better rates with higher scores. Loan-to-Value Ratio and Down Payment:Lenders also look at the loan-to-value (LTV) ratio, which compares the size of your loan to the value of the home. A larger down payment lowers your LTV, making you less risky to the lender and possibly earning you a lower interest rate. If your LTV is higher, you might have to pay for private mortgage insurance (PMI). Loan Purpose and Type:Whether you’re buying a home, refinancing, or doing a cash-out refinance can affect your rate. Typically, cash-out refinances come with higher rates. The loan type—fixed-rate or adjustable-rate—also impacts your rate, with adjustable-rate mortgages (ARMs) often starting with lower rates than fixed-rate loans. Loan Term:Shorter-term loans, like 15-year mortgages, tend to have lower interest rates than 30-year loans. However, your monthly payments will be higher with shorter terms. Loan Amount:Smaller loans can sometimes have slightly higher rates, while loans closer to the upper limits of conforming loan amounts may have slightly lower rates. Jumbo loans, which exceed conforming limits, generally come with higher rates. Location:Your home’s location can also affect your rate. Lenders may charge higher rates in areas with a higher risk of default or where foreclosure laws make it harder to recoup their losses. How to Lower Your Mortgage Rate Improve Your Credit Score:Raising your credit score can make a big difference in the rate you qualify for. Start by checking your FICO score and review your credit reports for any errors that could be bringing your score down. Increase Your Down Payment:A larger down payment reduces the lender’s risk, which could help you qualify for a better rate. Talk to your lender about how your down payment and credit score affect your rate. Pay Points on the Loan:You can lower your interest rate by paying mortgage points, which are fees paid upfront to the lender. One point equals 1% of your loan amount, and paying points lets you reduce your interest rate in exchange for a fee. This can be a good option if you plan to stay in the home for a long time. Understanding how mortgage rates are determined and what steps you can take to lower them can help you save money over the life of your loan.