Guest post by Salina Tornabene, mortgage loan officer with Guild Mortgage
There are subjects rarely taught in schools that indeed, shape our future as we venture into the “real world.” “Credit 101” isn’t covered in our educational system and in the end, albeit an ugly truth, credit has the potential to define our lives. It certainly costs more money to have no or bad credit than to maneuver through your financial world with good credit.
I thought I would break it down just a bit so – so the mystery is dispelled.
Here are some credit basics you should know.
NO Credit is BAD Credit
As you start off in life or advise those moving into young adulthood, it is indeed a good thing to have credit.
Get Started With A Secured, Revolving Line Of Credit
A “secured,” revolving line of credit at a bank is a great option to get started with credit. That is using your own money, deposited with a bank and the bank reports how those funds are used to one or all three credit bureau agencies. These accounts can be opened with as little as $300, and again, these are your OWN funds as you start out. To further clarify, a revolving line of credit is an account that allows for a credit line to be accessed then paid down, and then you can re-access the funds again as long as the account is in good standing.
Keep Your Balance Owned To A Revolving Credit Line To 30% Or Less
HOW you utilize this revolving line of credit, will determine your credit as you start off. With any revolving line of credit, the maximum that you would want to use of funds available is 30 percent. (So if you deposit $300 of your own funds into this sort of account, make sure to keep the balance owed to no more that $100 at any given time.)
Open One To Three Revolving Lines Of Credit
And again, keep the total balances owed to 30 percent or less of the credit lines available.
NEVER Close A Revolving Line Of Credit
Yes, this sounds crazy, but it’s true. You can keep the balance very low or pay it to zero, however, closing the account actually drops your credit score unnecessarily.
Have ONE Installment Loan
Car loans and student loans are in this category. An installment loan is an outstanding balance that requires the same agreed upon payment every month, with a specific term noted and an interest rate that can be fixed or adjustable.
Student Loans Count Against You When You Buy A Home
Student loans, even if in deferment, DO count against you when you go to buy a home, so be aware of that. Depending upon what type of mortgage you choose, 1 to 5 percent of the balance of any student loan is counted toward your total debt. Be thoughtful with student loans, taking out what you need and no more.
Consolidate Student Loans, If It Makes Sense.
Once you have completed school consider whether to consolidate your loans. Confirm what the rate is on each student loan, if you have more than one, and then compare that to what the rates will be if consolidated. There are also fees that go along with consolidations, so again, compare all pertinent numbers before making the final decision to do so.
Purchase Your Home THEN A Vehicle, If Possible
For an auto loan, if at all possible, if you have intentions of home ownership, it is best to wait until after you buy your first home to have a car payment or to at least keep the monthly payments as low as you can when you do finance your first vehicle. Just remember, the more debt you have, the less home you can afford.
Be ON TIME, Every Month, With No Late Payments
To aid with this, utilize automatic payments. Set the auto pay to pay at least the minimum payment and budget to pay off credit cards on a monthly basis if and whenever possible.
Keep Track Of Your Credit Score
If you already have credit and are a bit credit challenged, Credit Karma www.creditkarma.com, is a great resource for seeing where you are at and they can offer “what if” simulators that can suggest small changes to your credit that may indeed have great impact overall.
In short, a lender wants to see that you have credit available to you, and that you don’t use all of it. That is what dictates good credit. Credit is like life: we are in the solution, or we are in the problem. If you are in the problem with credit and want to discuss solutions, I am happy to help you find your path!
Salina Tornabene is a mortgage loan officer with Guild Mortgage, serving the Denver Metro area and the state of Colorado for over 18 years. Salina has helped clients with a range of needs, from the first-time home buyer who needs credit consultation to the client who’s building their custom dream home and is in need of permanent financing. Her most recent focus is helping clients utilize their equity to purchase their first investment property. Salina is committed to her clients’ success, having coached them from the dream of home ownership, to creating wealth on all levels, with real estate. Call 303-437-7200 today to get in touch with her.