The first step to buying a home is to understand your credit score. In today’s blog, I’ll show you what it is, why it is important, and how to find yours as it is easier than many people think.
What is Credit?
Credit is the ability to borrow a lump sum of money to make purchases or investments. It allows you to acquire goods and services immediately while paying for them over time, usually in the form of monthly payments with interest. Common forms of credit include credit cards and loans, including mortgages.
When you use a credit card, you’re borrowing money from the card issuer, like Visa or Mastercard, to make your purchase. This means you’re spending someone else’s money upfront, with the promise to repay it later. You typically pay back the borrowed amount monthly, along with interest, until the balance is cleared.
Loans operate in the same way. When you take out a loan—for example, to buy a home—the lender provides a lump sum up front to make that purchase. In return, you agree to pay back the loan amount in installments over a predetermined period. For many mortgages, it is often either 15 or 30 years.
What is a Credit Score?
A credit score serves as a financial snapshot that measures your past financial behavior to predict your ability to repay borrowed money. According to the Consumer Financial Protection Bureau, a credit score is “a prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports.”
This means your credit score reflects your past actions with credit, allowing lenders to gauge your reliability. For instance, if you frequently utilize credit cards and maintain high balances or have a track record of late payments for loans, lenders will view you as a higher risk, leading to a lower credit score. On the other hand, if you keep low balances and make on-time payments, your credit score will be high and likely grow because you have a lower risk of non-payment.
It’s important to note that you don’t have a single credit score. Three major credit reporting companies—Equifax, Experian, and TransUnion—may assign you slightly different scores based on their evaluations. Furthermore, different lenders may apply different scoring models depending on their internal processes and rules for underwriting.
Why is this important?
Understanding credit and credit scores is essential for managing your finances. Your credit will determine the mortgage you can get, the home you will be qualified to buy, and everything else when buying a home. So, it is foundational to everything else.
If you want to check out your credit score for free, you can go here: https://www.experian.com/
Here, you can create a free account and get a free monthly report on your credit. They will try to get you to sign up for a paid membership, and they are a bit sneaky about it. But you can bypass the paid version and get your basic credit score right now.
If you don’t have credit or need to improve your credit, we’ll talk about that next week.
