Life Hacks for Good Credit?
This month, I would like to talk about the importance of credit, especially when it comes to getting approval for a mortgage. If you are new to the credit game, then I hope these tips will help you get a head start to financial stability!
Typically, a lender will look at three factors when deciding to offer you a commitment letter. The better things look, the better chance you have that they will lend you the funds for a mortgage. If you guessed that credit is one of these factors, then you are absolutely correct! The three factors are the following:
- Credit – Your Beacon Score/Credit Score
- Collateral – The property being financed
- Capacity – Your ability to afford the mortgage payments
The reason we are covering credit, is because it can be the easiest to establish for a young adult, and also can be the primary indicator for if a lender is willing to lend.
Generally, around the time you hit the age of 18, you may start seeing some credit card applications in your mail box. Or, you may have sought out your own credit card, through your bank. In either case, this is the start of your credit journey! Keep in mind that a credit card is different from a debit card through your bank. You can only build credit with credit. Once you have your shiny new credit card, it’s time to go out and be a big spender right!? Not exactly. This is one of the main mistakes young adults make when establishing credit. Believe me, I know. I just had a talk with my kids about this exact subject.
The best thing you can do, is to use your credit card when you know you have funds to pay off the balance. For example, let’s say you have $50 in your bank account, and you want to order a pizza. No problem, go ahead and order that pizza! However, use your credit card to pay for that pizza. Then immediately pay off your credit card with the funds from your bank. This way, you are only spending money you actually have access to. Grocery shopping is another great trick for this. Most people budget for grocery shopping. So, typically you know how much you have to spend. When you go grocery shopping, spend that budgeted amount using your credit card, then pay it off immediately from your bank account.
“But Kris, why would I do that, instead of just paying for everything out of my bank account? That is a few extra steps just to get to the same results!”, I hear you saying! Well, not quite. The important difference is that you’re building your credit. The way that your credit score is calculated is dependent on a few different categories. I am not going to go into detail about each category, but suffice it to say, that Payment History, and Utilization, takes up over 60% of your credit score!
The payment history indicates how well you are at making your payments, in regards to credit. You never want to make a late payment. Always pay before the due date. The utilization indicates how much available credit you have access to. For example, if your credit card allows you a balance of $500, and you currently spent $400, then your utilization for that card will be high, because you’re using the majority of that $500 credit limit.
So what you are essentially doing by using this trick, is keeping your payment history in good standings, while also keeping your utilization down. This in turn will start to increase your credit score over time. With a really good credit score, you should have an easier time securing a mortgage, a car loan, anything that requires someone to pull up your credit report. It’s that easy! Get your credit card, try to stick with just one card to start. Use that card to purchase items that you already have money in your bank account to purchase. Then pay that card off immediately from the funds in your banking account. Also keep in mind to make your monthly payments that your particular card has, and make those payments before the due date.
I hope that this can serve as a great tip for young adults trying to establish credit.
Published by Kristopher Reaves