How Buying A Home Can Improve Your Credit

How Buying A Home Can Improve Your CreditWhen looking to purchase a home, most prospective buyers view it as an investment or a dream finally come true. Viewed this way, it is only natural that you want to come to the table with the best credit score possible. But what you may not realize is that buying a catalogues for bad credit could actually improve your credit score and lay the foundation for receiving loans in the future. Here’s how:

Low Debt-To-Income Ratio

If you’re preparing properly for your home purchase, you’ve already begun to pay off old debts and reduce your reliance on credit cards.  This doesn’t mean that you’ve closed all of your credit card accounts. A matter of fact, you want to keep high credit line accounts open and pay down your balance to zero when possible. By holding a zero (or close to zero) debt balance, you reduce your debt-to-income ratio. A low debt-to-income ratio means that you owe a lot less money than you earn and it reflects positively on your credit rating. If you maintain this low debt-to-income ratio after your home purchase, you will continue to reap the benefits and improve your credit rating in the long-term. To maintain a low debt-to-income ratio you’ll need to:

  1. Pay off credit card balances.
  2. Increase credit limits when possible.
  3. Increase income when possible.
  4. Keep credit card balances at zero or close to zero.

Reliable Credit History

Despite many myths surrounding the issue, many problems getting loans and other lines of credit don’t originate with a bad credit history. The truth is that many potential borrowers simply don’t have enough credit history to prove to lenders that they’re a worthy credit risk. Or, they don’t have credit history that reflects the diversity of credit available. There are three types of credit available to consumers:

  1. Installment credit – This type of loan allows borrowers to repay in equal amounts over a set period of time. The most common type of installment credit is a mortgage.
  2. Revolving credit – This type of loan allows the debtor to borrow a set amount of money repeatedly as long as their account is in good standing. To remain in the good standing the borrower must at the very least pay on the balance each month. Credit cards are a type of revolving credit.
  3. Open credit – This type of loan is similar to a credit card, but requires that the borrower repay the balance in full each month. A charge card is an open line of credit.

When a debtor applies for a loan, the lender likes to see that the borrower has different types of credit in their history. If the borrower has a mortgage and has made timely payments for at least a year, they’re more likely to be approved for additional credit such as a car loan or credit card. Ensure finding the right personal loan company which can offer you loans without any hindrance despite if you have a bad credit score.

Higher Credit Score

If you make timely payments on your mortgage, reduce your reliance on credit cards and continue to increase your income, owning a home could improve your credit score.  Below are five factors that are considered when determining your FICO score:

  1. Timely payments. Just paying your mortgage on time could increase your credit score.
  2. Credit diversity. As mentioned earlier, you must have credit that falls into different types of categories. A mortgage is the best type of installment loan for improving your credit.
  3. Credit history age. The longer you’ve been borrowing, the better. Even if you don’t use credit cards much, just having a few years of mortgage payments under your belt will help improve your credit score.
  4. New accounts. Opening new credit accounts over time will improve your FICO score. For example, opening a retail credit card for home improvements could actually help raise your credit score.

The next time you prepare to purchase a home, remember that it’s not just an investment in real estate, it’s a positive step in improving your credit history, according to AAACreditGuide.com.

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