Would-be homebuyers tend to give their credit score some extra attention in the lead up to a home purchase.
While it might be tempting to loosen the reigns once you’re settled into that new home, maintaining your credit after closing is important, especially if you’re likely to seek credit in the future.
As a homeowner, it’s crucial to understand the steps you can take to build and maintain good credit.
Your credit scores are a representation of your willingness and ability to repay your debts.
Your credit score is typically made up of five major factors:
Creditors like banks, mortgage companies, car dealers and others report your credit utilization and payment history to one or more of the country’s three credit bureaus: TransUnion, Equifax and Experian.
Each agency uses a slightly different set of metrics to determine credit scores, but they all look for similar things.
There are some basic strategies and steps you can take to maintain and boost your credit score as a homeowner. The first is the most important, and it’s one you’re undoubtedly familiar with by now: Stay on top of your payments.
A history of on-time payments is one of the most important components of a healthy credit score, and it’s even more critical once you start paying your mortgage.
A recent 30-day late mortgage payment can tank your scores by 100 points or more. If you’re worried about remembering your payment due dates, consider setting up auto-drafting from an account with a consistent balance.
Reach out to your loan servicer immediately if you find yourself having trouble making your payments.
As a rule of thumb, your credit scores will be better off if you keep your total balances at or below 30 percent of your total available credit. If you have a card with a $3,000 limit, for example, that means keeping your balance under about $1,000.
That can also mean it might be more beneficial to open a new credit account instead of taking an existing account close to its limit. When you open a new account, you increase the total amount of credit available to you, making it easier to maintain lower balance-to-limit ratios.
When it comes to credit scores, consistency is key. That’s why 15 percent of your score calculation comes down to the age of your credit accounts.
Instead of closing accounts once you’ve zeroed them out, make and pay off small charges every month to keep the credit line open and reporting. Creditors might close an account if you don’t use it for several months in a row.
Keeping older credit accounts open helps increase the average age of your credit accounts, and lowers your balance-to-limit ratios.
After you close on your home, you may be eager to buy all new furniture or spring for a kitchen remodel right away. If you open new credit accounts to foot the bill for décor and home improvements, be aware that your credit scores could suffer as a result.
Even if you can easily afford the payments, opening a lot of new accounts sends a red flag to the credit reporting agencies that your finances may be headed downhill.
Spacing out big credit purchases is a wiser choice.
Credit accounts can generally be lumped into two categories: installment loans and revolving accounts.
Installment loans are loans you borrow in a set amount then repay over a set term at a fixed monthly payment. Mortgages, student loans, and auto loans are all installment loans. A credit card is a good example of revolving credit, which allows you to use, pay down and re-use your credit line month to month.
By keeping at least one of each open and in good standing, you demonstrate your ability to responsibly manage a variety of account types.
Not only is your credit score a measure of your creditworthiness—which can impact your ability to take out loans, open credit cards and even refinance your home—it can be a measure of your overall financial health.
As a homeowner, building and maintaining good credit habits is an important skill that can benefit you for years to come.
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