We continue to process the pain and hope of our nation’s uprising for racial justice amid a global health crisis. You can see our recent statements on the uprising here, our COVID-19 web page here, and our Race & Housing resource center here. Expanding homeownership is a key component of racial equity and health, so our mission has never been more important—and we’ll continue to share the stories of Habitat’s work.
Credit is crucial to buying your first home, but it can seem intimidating – especially if you have no credit history. When handled properly, credit can give you a leg up in getting a mortgage, so it’s important to understand what credit means to you as a first-time homebuyer and the components that impact it.
In the video below, Homeowner Development Manager Pa Lor explains what credit is, how it works, and how to understand your credit report as you build it:
- What is credit? What ISN’T credit? [0:11]
- What is a credit score? [1:09]
- What is a credit report? [2:06]
- Monitoring your credit [2:25]
What is Credit? What ISN’T Credit?
Credit is an agreement between an individual who wants to borrow money and a creditor who’s willing to lend it to them. When you (the “consumer”) borrow money on credit, the creditor lends that money to you “on trust that you’re going to pay it back,” Pa says. “There’s always an understanding that it’s going to be paid back at a later date.” Loans, mortgages, credit card purchases – those are all transactions based on credit.
That’s the core of credit: it’s a promise between lender and consumer. To build credit, you can’t just spend money – you have to prove you can follow through on that promise by repaying the money you borrowed. That’s why non credit-based transactions won’t help you establish credit. Pa says, “I hear a lot of people say, ‘I use my money to pay for things, and I never borrow money; I pay all my things on time. Does that give me credit?’ Unfortunately, when you use your own money, even when you use it responsibly, it doesn’t generate any credit for you.”
That means you have to borrow money to earn credit, and your financial reputation will be based on your ability to keep that promise over time.
What is a Credit Report?
Each time you borrow money from any creditor, the transaction will be tracked as part of your history with credit, also called your credit report. “Loans that you’ve paid off, accounts that you’ve had,” Pa says. “Anything at all – it’s a record of all of your interactions with credit.”
Your credit report is one of the elements a mortgage company will look at when deciding whether or not to grant you a mortgage. If they believe you’ll pay back the money you want to borrow, they’re much more likely to grant it to you.
What is a Credit Score?
Each time you borrow money from a lender and it’s entered into your credit report, you’ll be rated on how quickly and reliably you pay it back. The rating is called your credit score, and it’s a quick and easy way for lenders to judge your credit history.
A credit score can range from 300 (poor) to 850 (excellent). You can earn a higher credit score by repaying money on time, every time, to show you’re a trustworthy consumer. But as a borrower, it’s important not to get too hung up on the number: “I think the credit report is what's really important,” Pa says. “Essentially, your credit score is made up of what's reported on your credit report” – so keep an eye on your credit report for a better idea of how you’re doing financially.
Monitoring Your Credit
Three major reporting agencies (also called credit bureaus) – Equifax, Experian, and TransUnion – collect consumer information like your credit report and distribute it to lenders when you apply for a loan or mortgage. You can request a free copy of your credit report from each of these bureaus at annualcreditreport.com once per year per bureau.
Pa recommends staggering your requests to once every few months so you can see how your report changes over time: “That's a way for you to also have some free credit monitoring of your own [to see] what's going on with your accounts throughout the whole year.” You can also request your exact credit score from one of these bureaus for a small fee.
If something doesn’t look right about your credit report – if it shows you missed payments you know you paid, for example, or if it lists charges you didn’t make – “that will impact you in a lot of different ways,” Pa says, including whether or not you can get a mortgage as a first-time homebuyer. If something is off about your credit report, you can dispute it with the bureau from which you requested it.
A healthy credit report is key to securing an affordable mortgage and ensuring long-term financial health. Make sure you understand how credit plays into your financial situation when applying for your first mortgage.
If you found this video helpful, check out more tips for first-time homebuyers on the Twin Cities Habitat for Humanity YouTube channel!