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6 Secrets to Establish Credit Quickly for People Planning to Buy Their First Home with Limited or No Credit

by June Bloom

Buying a home at a good interest rate doesn't just happen when you begin looking at homes. It starts weeks and months and even years before. One of the most important things to do before you start planning to buy a house is to get credit established and obtain as high a score as possible. There may be millions of renters with limited or no credit who want to purchase a house, but they need to get a good game plan before applying for a home loan from a bank. But how to get it done? Keep reading to learn how to establish credit quickly so you can buy your dream home!

#1 Get Your Credit Report

Many potential home buyers who do not have much credit may have never even looked at their credit report. Anyone who wants to buy a house should review their credit report well before they even think about looking at homes. Federal law entitles you to a free credit report each year from the three credit bureaus. Just go to the Annual Credit Report site to get your free report. By reviewing your report, you can check if there is anything that is holding you back from building credit quickly.

#2 Look for Inaccuracies on Your Credit Report

Did you realize that 25% of people who are denied a home mortgage had mistakes published on their credit report? You would be surprised how many errors credit reports may contain. If you see anything on your report that is wrong, it is your responsibility to fix it.

One trick that many do not know is that the credit bureaus sometimes do not follow all the rules when they post a negative mark on your report. If you see a negative on your report, you should try to dispute it to see if it can be removed. On the TransUnion, Equifax and Experian credit bureau sites, you will find detailed instructions for how to file a dispute about any negative item on your report. Follow these instructions closely and keep a complete record of each dispute. Expect a response in less than 60 days.

#3 Sign Up for Credit Cards But Use Responsibly!

People with little to no credit have to use credit cards to build up credit. They should be used carefully and in moderation, however. So, apply for two or three credit cards. People who have limited credit history should be able to find credit card companies that will offer than credit cards with a low limit, such as $500 or $1000. Use those cards every month and always make payments on time, more than the minimum payment of course. You really should not use more than 20% of 30% of your available limit, and pay it off every month. If you keep using that card steadily and properly, the company will increase your limit and this will boost your score.

#4 Keep a Credit Card at Zero Balance

Lenders look at how much credit you have and how much you are using. This is called credit utilization. If you are applying for a mortgage soon, keep your credit utilization low. Some experts say keep it under 20% of your total limit of all your credit cards. You might have one credit card that you use and pay it off each month, and keep another card with a zero balance. This way you are actively using your credit responsibly but are keeping a very low credit utilization ratio.

#5 Consider a Car Purchase

Many experts would not advise buying a car right before you get a mortgage, and that makes sense. You will be using a lot of your available credit. This drops your score. However, if you need to establish credit to buy a home, making regular payments on a car is a good way to show that you can handle debt responsibly. A car loan is a form of installment loan, and paying one on time shows lenders you are worth the risk.

Car loan companies tend to be more lenient in giving loans to people with mediocre or limited credit; a car is a much smaller purchase than a home, and a car can easily be repossessed. One possible strategy would be this: Buy a used car a year or two before you want to buy a home. Make payments on time on that car and this can help you build credit quite quickly. Trans Union, Experian and Equifax all seem to value a consumer make a monthly payment on time with an installment loan. Don't buy a car that is too expensive however as this could eat up too much of your available credit and lower your score.

#6 Pay More than the Minimum

Once you have credit cards, you want to use them, but use them responsibly. Running up debt and making minimum payments is a no-no. The minimum monthly payment should be used only in an emergency. Always overpay on your credit cards. Minimum payments only for months and years on end is not a good indicator for any lender reviewing your report.

To Summarize

To build credit quickly to buy a home, you need to use credit but you have to use it in a responsible manner. If you apply for several credit cards and cannot resist the temptation to buy everything in sight, you are not doing yourself any favors to get a home loan. So use your credit carefully and consistently, and you will soon have a sufficient history to apply for a mortgage.

 

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