EmailCall

Mortgage Guide

How to get a home loan

How to build credit fast for a better mortgage rate


Most people have a misunderstanding about building credit. Building your credit score is incredibly easy and can be done quickly. In fact, you can establish a strong credit score with no prior credit history in just six months. This goes a long way in not just getting you approved for a mortgage, but also improving your mortgage rate.

Read on below to learn how to build your credit quickly and efficiently. We’ll review what you need to do, how to do it, when to check for your results, and what your score range means. By building credit, you’ll be able to get approved to buy a home and open numerous financial avenues for yourself.

How to start building credit fast.

The guaranteed way to immediately establish credit is to open an account secured by your own money. This is commonly referred to as a “secured” credit card or installment loan to build credit. Here are two ways you can do this:

  • Establish two secured credit cards - preferably with an account that will roll over to an unsecured credit card after you’ve demonstrated you handle the account well.
  • Open and pay off one secured installment loan over six months or more.

When you’re first establishing your credit score, you’re starting off at zero. This means, by default, you have no credit mix, no credit history, and all of your credit will be new.

Keep all that in mind as you look at the image below to understand how your FICO credit score is established:

If you open two secured cards and an installment loan at the same time, 100% of your credit will be new. 10% of your credit will work against you, and 100% of your credit will also be new, so that’s also working against you. This means you’ll be focusing on the other 75% of items that factor into your credit score. Since you’ll already have 25% working against you, it’s extremely important that this other portion is perfect to establish a strong score. Here’s how you can do just that:

  1. Use your cards monthly, but immediately pay them off and keep a zero balance. This will help to give you the best score possible for the 30% of your credit that’s based on amounts owed/credit card capacity.
  2. Pay all accounts on time or early. When you’re first getting used to your credit card due dates, I recommend scheduling reminders to verify that you’ve made your payments. While some cards/loans offer automatic payments, you’ll want to make sure you’re manually verifying the payments have gone through whenever possible. This will affect 35% of your credit score, making it the largest category. Newer payment history will be more strongly considered than historical data.
  3. By having the credit cards and the installment debt, you’ve established two different types of credit! This will help improve the 10% of your score based on credit mix. After about six months, you’ll have established a strong credit score where you’ll be qualified for better rates for a mortgage pre-approval, auto loan, or other types of debt.

As a result, you’ll need to start off with a strong opening to have good score immediately. By establishing two credit cards immediately, you’re starting off your payment history with two accounts, and you’ll be building your average age of credit history at the same time. Each time you open a new account, the average age of your credit will drop.

How do I get these accounts?

A typical secured credit card will have a minimum limit of somewhere from $200-$500. Secured installment loans don’t necessarily have a minimum, but each bank or credit union will have their own requirements regarding these. When you’re trying to set-up these accounts, it’s usually easiest to do so with the financial institution where you do your banking.

If you’d like to reach out to a consumer banker to learn more about their specific products for building credit, you may want to try Patrick Offerman with First Midwest Bank. He can help you with setting up a secured credit card for a minimum of $200 and a secured installment loan for a minimum of $500. Ask Patrick about timelines for when you’ll see your $200 or $500 returned to you. Remember, you’re not paying for the loan, you’re just using your money as collateral while you build! Over time, you will be able to raise your credit limit, as long as you continue to have good credit habits.

When should I start checking my credit?

Six months from the date of your first payment, you’ll have established a credit score with all three bureaus. If you’ve kept your credit card active but paid off, you should have a solid credit score and be able to credit qualify for a mortgage with NewCastle Home Loans. You can check your credit once annually for free on annualcreditreport.com.

You may also use one of the various free credit monitoring services. However, something to keep in mind with any “free” or “soft” credit inquiry is that these will likely differ from the credit used with a “hard” credit pull for a loan application. As part of this difference, you’ll likely see different scores with variances as large as 60 points. Once you’ve established your credit score, it’s best to use free credit monitoring to detect any major changes and if they have a positive or negative impact on your score rather than watching your score.

What is a good credit score?

Credit scores are changing all the time and change every time a creditor reports something to the bureaus. With this in mind, below is a general guideline to what constitutes a healthy credit score or a credit score that needs work:

FICO Credit Score Categories Credit Score Range

fico credit score category and range

 

Building credit up from nothing is straightforward once there is a plan in place. With the above plan in place, you’ll be on your way to a healthy credit score within the next year. You’ll now know what to do, how to do it, when to check your status, and what your goals should be.

Want to check rates for your credit score goal? See our mortgage calculator on our home page to run free automated estimates with our live rates.

Bonus: What about authorized users?

Normally, I don’t recommend using authorized user accounts to establish your credit score. While it’s true that these types of accounts may give you a temporary benefit, each of the credit bureaus actively work to reduce the effect that these types of accounts have as this is not a true reflection of your credit-worthiness. Additionally, while you’re only an authorized user and not technically responsible for this debt, any delinquencies on this account may have an adverse effect on your credit score until sorted out.

This can be a problem while trying to get a pre-approval for a mortgage or anything else that involves your credit score as you’ll likely be caught off guard by any delinquencies on a card you don’t manage.

While it’s tempting to pursue a route that may provide temporary but immediate benefit, it’s ultimately more efficient to build your credit score exclusively through your own accounts.

Want to know more?

If you have any additional questions about building credit and how it’ll affect buying a home, feel free to reach out to me at 773-770-4713 or jimquist@newcastle.loans.

Schedule a time to talk

You may also like:



How to get a DACA mortgage to buy a home

DACA? Did the bank deny your mortgage? See how to get a DACA Mortgage - Same terms available to U.S. citizens - Buy a home in 10 days...

How to lock-in a low mortgage rate

This article answers: what is rate lock? How long is the rate lock period? How do I lock my mortgage rate? What if rates drop after I lock? Can I get an extension?

Can I get a mortgage if I owe federal tax debt to the IRS?

You don't need to pay off the entire IRS tax debt you owe in order to qualify for a mortgage. You will just need to meet certain loan requirements.

Subscribe

Buying a home and don't know where to start?

 

Our weekly email will supply you with homebuyer and mortgage basics to make the process simple.