If you want to buy a home, especially if you are shopping for a house for the very first time, you may need to build credit in the year or more leading up to your application.
First-time homebuyers who do not have a long credit history do well to consider building credit, which is not quite the same thing as repairing credit. That said, the procedures for building and repairing are often similar.
One important thing to remember; you don’t need a credit card to build credit. Some credit reporting agencies give you the option of having recurring payments (such as cell phones, utilities, etc.) added to your credit report.
These recurring payments can help establish a pattern of reliable payments, and you will need to make arrangements with each credit reporting agency individually to ensure those payments are showing up in your credit reports.
It’s never safe to assume that the good information reflected in one credit report has made it to all of them. The credit reporting agencies do not share information with one another.
One option that can help you can build credit over time is to apply for a secured credit card, make your payments on time, and establish a pattern of those on-time payments. A secured card is opened using funds you provide as a deposit to “secure” the card.
But applying for one of these secured cards is not the only way to build credit. If you are added to someone else’s account as an authorized user you can get similar results. However, being added as an authorized user should be seen as a bridge step toward you getting your own credit account.
The key in those cases is to make sure you and the person sharing the credit account with you both pay on time to reap the positive benefits of the arrangement.
A small installment loan can also be helpful as a credit builder, but you will need to time the loan so that you have it paid off before you apply for an FHA home loan.
Doing so means the loan won’t show up in your debt-to-income ratio calculations, which is a plus at loan application time. You want to avoid applying for an FHA purchase loan or FHA Cash-Out Refinance loan with too much outgoing debt for best results.
Building credit also means paying attention to the type of credit you may already use. Avoid store credit cards and focus on paying down any store cards you do carry. On-time payments for these and all other accounts are crucial in the year leading up to your FHA mortgage loan application.
When you pay off a store card, resist the urge to cancel it as doing so can hurt the credit score you are trying to build.