It’s time to brace yourself, we’re going to talk about your credit history
- Rule #1: Always pay your bills on time
- Rule #2: High balances equal lower scores
If you haven’t read that post yet, you can click here to go check that out. Don’t worry, we’ll be here when you get back.
Alright, in this article we’re going to go over the next two rules and how not following them will directly affect your credit score.
Let’s get started.
Rule #3: You Must Have Established Credit
There is a saying that you’ve probably heard before that goes something like this:
“The best time to start something is twenty years ago, the second best time is now.”
When it comes to credit, your history matters.
If you want to get access to the best rates for loans, credit cards, or mortgages, you need to have a history that shows you’re a reliable bet.
One of the most common recommendations we make to our clients is something we call the rule of two’s.
I know, we’re really into rules in this industry!
You need to have two different trades (credit card, installment loan, line of credit, etc.) for at least two years, with a limit of at least $2500 each in order to be considered to have established credit with our lenders.
Anything less and it’s very difficult to secure a mortgage or any kind of loan really.
Let’s think about it from the perspective of the lender again like we did in the previous article.
You have three different people in front of you asking for money, let’s say it’s a large sum of money this time.
Each of them are looking to borrow $100 000.
You know the first person has a history of missing payments and falling behind, but they have always managed to get caught up eventually.
The second person has a pristine history of borrowing money, they’ve always paid on time when they said they would and you consider them very reliable.
The third person has never borrowed money from you. In fact, they have never even had a credit card or gotten into any sort of debt at all.
If you only had enough money to loan to two of these people, which of them would you choose?
Obviously, your first choice would be person #2.
They’ve proven to be reliable and capable of handling their debts responsibly so you can probably count on them to pay you back in a timely manner.
The real question is who would your second choice be?
Believe it or not, a person with a shaky credit history is probably higher on the list than someone with no credit history at all.
With the person with bruised credit, at least you know something about them and how they handle money.
This is a good place to touch on interest rates a little bit.
There is a time value to money, it’s worth more in the present than it is in the future. That’s why you pay interest to borrow money.
It’s basically a fee for pulling that money from the future to be spent in the present.
But the interest rate also reflects how risky you are as a borrower.
Going back to the three borrowers again, the person with the history of handling debt well is going to be offered a lower interest rate than the person with a shaky history.
As the lender, you are more likely to get your money back on time and in full with that person so you would feel comfortable offering them a lower rate.
Especially if they were shopping around to borrow from other people.
But how do you evaluate how risky someone is if they have no history at all?
If you’re going to be in the market to buy a house in the near future, make sure you follow the rule of two’s and start establishing your credit history sooner rather than later.
Rule #4: Some Types Of Credit Are Better Than Others
This rule is about you.
If you want your credit score to improve, you need to understand how your habits got you to where you are now.
Chances are, you don’t have a debt problem, you have a mindset problem.
If you find yourself using credit cards to finance your lifestyle and are always living beyond your means, then maybe a credit card with a high limit is not the best choice for you to be carrying around.
You need to know what your weaknesses are if you’re going to make progress on your credit history.
When it comes to credit, there are a huge number of options available to you. Options like:
- Credit cards
- Lines of credit
- Personal loans
- Secured loans like financing a car
- Cell phone contracts
- Charge cards
- Home loans like a HELOC or a mortgage
Each of these come with different levels of temptation and access. If you know you can’t trust yourself to not spend money you don’t have, you should avoid applying for loans or credit cards that allow you to get yourself into trouble.
Remember the rule of two’s, a $2500 balance is enough to establish your credit history. Until you feel like your capable of spending within your means, keep your limit at the bare minimum it needs to be to get the job done.
When the credit card company calls and offers to increase your limit, say “No thank you, I’m all set.”
If you’re currently in debt and falling behind, tapping into your equity and consolidating everything into one low interest account is a great idea, but…
It does come with risks.
At Ardent Mortgages, we specialize in helping our clients unlock their equity and pay off their unsecured debts.
Our goal is to help our clients rebuild their credit history and get back to being bank worthy.
The danger is, as weird as this may sound, sometimes our solution is too easy.
Getting into debt is usually a result of habits, occasionally it’s a result of difficult life situations but those are more rare than you think.
Debt is usually a mindset problem, not a money problem.
If our clients don’t deal with the underlying habits that got them into debt in the first place, once we consolidate everything, there is a good chance the first thing they will decide to do is go shopping!
Which is why we work with our clients before, during, and after the deal, to help them stay on course and avoid falling into the same debt traps as before.
In order to do that, you have to know what kinds of credit you can handle and what kinds you can’t.
And that’s why some kinds of credit are better than others.
In the next installment of this series, we are going to get into Rule #5 and #6 and continue exploring the world of rebuilding your credit.
In the meantime, if you’re ready to talk about your mortgage options, feel free to give the Ardent Mortgages team a call at 519-772-7615 or click here and schedule a call to speak to one of our dedicated mortgage professionals.