There are many reasons why you should avoid a low credit score. This score plays an important role in a lot of financial transactions. Believe it or not, it can even affect the job opportunities that will come your way.
Your credit score is calculated based on the data on your credit report. This report monitors and tracks all of your credit behavior. If you practice good credit management habits, then you can expect that your score will be a high one. It is an indication that you are a responsible credit borrower and that you can be trusted to pay back your loan. This will help you get the best terms from a lot of lending institutions (e.g. banks, credit union, etc.)
If you have a low credit score, the opposite will happen. While it cannot keep you from getting a loan approval, it can affect the terms that you will be offered. Most of the time, the consequence of a bad credit score is getting a high-interest rate on the loan.
The importance of a credit score is something that you will realize when you are about to buy a house. This is one of the most expensive purchases that you will make. If you do not have the best financial situation, you should not consider buying a house – at least not yet.
According to a study done by Experian.com, 1 out of 5 home buyers postpones their plans because of a low credit score. Some of them had to opt out of the loan process because of their credit score situation and are probably going to wait 5-10 years before they will try to buy a house.
How to improve your credit score for home buying
There is no doubt, you need to improve your credit reputation before you buy a house. While a bad score will not keep you from getting a home loan, it will get you to waste a lot of money. If you really want to get the best terms for your mortgage, you need to do something about your low credit score.
Here are some of the things that you can work on to help improve your credit ratings.
Use credit cards wisely.
The thing about improving a credit score is to continue using credit but make sure you behave more responsibly when it comes to what you will purchase and how you will pay it back. A credit card is the best tool to use because it is a revolving credit. You do not have to keep on applying for a loan if you want to keep on using it. As long as your credit limit can accommodate the purchase, you are allowed to use it for credit transactions. Of course, you have to learn how to be a smart credit card user. If you want to continue enjoying this convenient purchasing tool, you have to learn how to use it properly. That means you have to be wise and selective about the purchases that you will put on your card. Otherwise, your use of the credit card might end up destroying your credit score.
Pay off your bills on time.
If you have existing credit accounts, it is best to pay them off on time. This is how you will show the mortgage lender that you can be trusted with the loan. You need to prove to them that you can pay your dues on time and that you will not give them a hard time collecting from you. This payment behavior is a huge part of your credit score computation. It will definitely boost your low credit score.
Lower your balance to limit ratio.
Your balance to limit ratio is also known as your credit utilization rate. This is simply the relationship between your credit balance and the credit limit that is imposed on you by your creditors and lenders. If you have a high credit utilization ratio, it means your balance is almost to your limit. You need a low credit utilization rate to boost your credit score. According to the State of Credit 2015 published by Experian, the national average credit card utilization in 2015 is 30%. This is actually a healthy rate and will help bring your score up. If you have a $10,000 credit limit, you need to keep your balance no more than $3,000.
Hold off applying for new credit accounts.
Finally, you have to hold off applying for new credit account because this can also affect your credit score. Whenever you apply for a loan or a credit card, the lender or creditor will pull out your credit report. This will be considered as a hard inquiry and can affect your credit score.
Improving your low credit score cannot be accomplished overnight so you have to start working on it as soon as possible. Sticking to one of these tips will help but it will be better to do as much as you can to expedite the improvement on your credit report. The faster you can improve your score, the faster you can buy a house.
Other reasons why home buying is delayed
Being a homeowner is still part of the American Dream but you have to make sure that you are ready for this huge financial responsibility. You have to be a smart homebuyer if you really want this purchase to improve your financial position. Unless you are ready, you should postpone home buying.
According to an article published on Fortune.com, a lot of young adults can afford to buy a house but they are not doing it. This worries economists because a strong housing market gives the American economy a boost. Among the reasons why homeownership is delayed are the following:
- The down payment. The article cited the data from Zillow that revealed how home buyers are waiting 6 years before buying a house because they had to save up for the down payment. We all know that the ideal down payment is 20% of the selling price. Any lower than that and it will cost you more in terms of insurance (PMI or private mortgage insurance).
- The mortgage application. The same data from Zillow also revealed that young adults are hesitating to buy a house because they feel that they will not qualify for a mortgage. This is most likely because of their low credit score – which is in accordance with the same study done by Experian.
- The necessity. Having a roof over your head is a necessity but owning that roof is not. Some young adults feel like it is not a priority in their life at the moment because they are not yet married or they do not have a long-term career. The article from Fortune revealed that this sentiment of young adults makes renting the perfect arrangement for them.
- The debt situation. In a separate article published on Forbes.com, it is revealed that the existing debt of young adults influences their decision to delay homeownership. The article is referring to student loans of course. But some of them also owe a lot on credit cards so they are putting their plans of buying a house until after they have lowered their credit balance.
These reasons are actually valid enough to put homeownership in the back seat. However, we have to think about the implications that it has on the economy in general. We have to consider how this can affect the housing market and the progress of the country’s economy.
Buying a house is considered to be one of the financial milestones that will make you a responsible adult. Low credit score or not, this is something that you need to think about for your future.