![build better credit](jpg/1_how_to_build_credita9ce.jpg?mode=crop&width=800&height=540)
Key insights
- Many millennials are nixing credit cards, but finding that a weak credit history can hurt their chances of homeownership
- Building credit can take a while, but there are ways to boost your score in the short-term
- It’s important to have a history of loan repayment, as well as responsible credit card usage, to get a loan today
While many millennials are sacked with crushing student loan debt, the vast majority — nearly two-thirds, according to this report — don’t have a credit card. It seems that coming of age during and right after the Great Recession has made this generation gun shy about living beyond their means.
But for millennials who are hoping to buy a home or make other big purchases, the lack of a credit card also means the lack of a strong credit history. Here are four ways that millennials with weak credit scores and histories can become better mortgage loan candidates.
1. Build a solid loan payment history
Installment payments like student loans or car payments are imperative to building your credit over time.
If you don’t have a loan to pay off each month, and your credit score is low (or you don’t have one at all), it may be worth it to get a co-signed loan with someone who has a strong credit history. Ask a trusted family member if they would consider co-signing on a loan for a car or other small- to medium-sized purchase (like furniture).
Keep in mind that with any loan, you want to pay as much of the principle (original cost of the item) as you can each month. If you can afford a car loan with a $400/month payment, consider buying a car with a smaller monthly payment, but putting the full $400/month toward the loan. That way, you’ll pay less over time, build stronger credit and reassure your co-signer that you take your payment responsibility seriously.
2. Become an authorized user on another person’s account
Another way to quickly build credit is to become an authorized user on another person’s credit card. To do this, you’ll need to work with the original card holder’s bank, providing key information like your social security number and other identifying information.
It’s important to keep in mind that becoming an authorized account user will only help improve your score if the original card holder has a solid credit history. In short, those with good credit usually have these four factors in place:
- An account that has been open for at least a few years
- A high credit limit
- A low usage rate (less than 30% of their credit limit) each month
- A history of paying their credit card bill on time
While it may seem odd to vet your generous family member or friend before signing on to their credit, the reality is that it won’t help you or them if you become an authorized user on an account that is often over-drafted or has a poor history of payment.
3. Get a starter credit card
If you don’t have any credit cards, consider getting a “starter” credit card with a limit of $300-500 a month. This will help you build credit slowly, without tempting you to spend beyond your means.
As we mentioned above, spending more than 30 percent of your monthly credit limit can damage your credit score, so determine right away what your max usage will be each month. Then, make a plan for how you’ll use the card — which is important for building credit — without going over.
4. Pay everything on time
Unfortunately, monthly payments like utilities and rent are not usually reported to credit bureaus unless you miss a payment. That means that you won’t get credit for paying on time, but your credit score will suffer if you miss a payment.
To keep your credit from being “ding-ed,” try not to miss a payment on any bills, including utilities, rent, mobile phone plans, doctor bills and more. Automate as many of your bills as you can, and create a budget from what you have left after these important bills.
What else can I do to build or check my credit?
If you’d like a personal analysis of your lending potential from one of our mortgage and financial experts, don’t hesitate to contact us. Whether we determine that you can buy now or you learn important ways to improve your loan chances in the future, it’s helpful to get a personalized assessment of where you stand.
To get even more tips on buying your first home, follow #BuyerInsights on Facebook, Twitter, Instagram and YouTube.