Credit plays an important role in your financial life. Your credit score is used by companies and lenders to determine whether they want to loan you money for a mortgage, car, credit card, or other types of credit accounts. According to a report from Experian, the average American’s credit score in 2022 was 714, with Millennials averaging a credit score of 687 and Generation Z averaging a credit score of 679. For individuals in these two generations wanting to buy homes, it can be hard to purchase a home when your credit score is lower than average or if you haven’t established a credit score yet. If you’re looking to improve your score or establish one, there are some things you can do that will help.
1. Pay down revolving balances
When it comes to your credit, paying down revolving balances is critical. You’ll want to make sure that you are making the minimum payment each pay cycle, and if you can, it’s better to pay the full balance off each month to avoid interest charges. Maxing out your credit line results in a negative impact to your credit score, so make sure you are making payments on time if you are charging things to your card. It’s also a good rule of thumb to make sure you aren’t spending more than 30% of your overall approved credit limit. This percent is calculated by dividing your total balance for all accounts by your total credit limit.
Read more on Building Credit for Young Adults.
2. Limit how often you apply for new accounts
Each time you apply for a new credit account, a hard inquiry usually appears on your credit report. A hard inquiry lasts for two years and will negatively impact your credit score. If you’re planning on purchasing a new home with lenders such as First Bank Mortgage in the next few months, try to refrain from opening any new accounts. Dean Pilcher, Area Sales Manager at First Bank Mortgage, said, “Research shows that opening several credit accounts in a short period of time shows a greater risk, especially for people that don’t have a long credit history. If you’re considering purchasing a home in the near future, it’s best to avoid opening new credit accounts.” He continued with, “If you must open a new credit account during the loan approval process, be prepared to provide a letter of explanation and other documentation to your lender.” Additionally, a new credit account can also decrease your borrowing power as your debt-to-income ratio may increase.
3. Dispute credit report errors
A good rule of thumb is to review your credit report each year. You are entitled to one free copy of your credit report each year from the three major credit reporting agencies. Look for any inaccuracies in your report that could be negatively impacting your score and dispute them, if needed. If you have old, unpaid balances that are in collections, it’s ideal to tackle those first as they could also be negatively impacting your score.
4. Don’t close your old accounts
While it might be tempting to close an old account that you no longer use, it’s a good idea to keep this account open. It contributes to the overall length of your credit history. When you close old accounts, the length of your credit history may decrease depending on when your next account was opened.
As mentioned earlier, your credit score is an important part of your financial life. It can be used for a variety of lending opportunities, so it’s important to make sure you are taking steps to improve and maintain your credit score.
For more information on how First Bank can help you reach your financial goals, contact a trusted First Bank representative.