Let's talk about credit: a primer for first-time homebuyers.

In the United States, building credit should be a top priority, even if you don't intend to borrow money for school, a house or a car anytime soon.

Credit also plays an important role in getting a job you want or (for those of you who aren't ready to buy a house yet) finding an apartment to rent. It even factors into things like qualifying for apartment insurance or a car insurance policy!

If you think that one day, maybe not too far from now, you'll want to own your own place, then you have to think about credit — and the sooner, the better!

Credit can be a confusing topic so let's break it down and see if we can answer some of your questions and concerns.

First of all, what is credit?

“Credit” refers to a contractual agreement between a lender (like a bank) and a borrower (like you). The borrower is loaned some money and agrees to pay the lender back in total, typically with interest, over an agreed-upon timeframe. The most common example of this is the credit card, but the same principle holds true when borrowing money to buy a house.

Credit history vs. credit score

When people talk about their “credit,” — like “my credit is good” or “my credit stinks” — they're usually referring to their credit history, which is basically a record of their credit usage. Lenders will examine credit history, along with several other factors, when determining whether to lend you money for a mortgage, car loan or credit card.

Credit history should not be confused with a credit score, which is a numerical representation of your credit history. The most familiar types of credit scores are the FICO score and the VantageScore, which rely on algorithms to calculate how much of a credit risk a borrower will likely be and how likely someone is to pay off their loans on time. If you have a higher credit score, you'll generally receive better terms on the money you borrow — like a lower interest rate or more flexible repayment terms.

How is a credit score determined?

Maintaining a good credit score important. It shows the lender that you can be depended on to repay your loan on schedule. To keep on top of things, it's good to understand what goes into building a credit score. There are three main credit bureaus tracking credit scores in the US: Experian, Equifax and TransUnion. Not every lender uses all three, but all three use the following criteria when calculating someone's credit score.

Here's what credit scores are based on:

• 35% is based on payment history. This shows whether or not you have a history of making complete payments on time?
• 30% is based on your debt-to-credit ratio. This compares how much credit you have available versus how much you're using.
• 15% is based on the length of your credit history. Have you only had a few months of credit usage that is being tracked, or have you had a decent credit history for several years?
• 10% is based on the credit mix. For example, what type of credit are you currently using? This could include credit cards, student loans, car loans and mortgages.
• 10% is based on new credit accounts. They look back over the past two years to see how many times you've applied for new credit?

How is credit score data collected?

The credit bureaus listed above get their info from collected data reported by lenders you've opened credit accounts with. When you apply for something like a home loan, your lender looks at your reported record. Then, each new loan or credit card further informs your activity to the credit bureaus, with the new loan also added to your credit history.

What else is reported? Your name and aliases (if known), your social security number, recent addresses, how long you lived at each one and much more.

Other businesses also work with credit bureaus, which is why you shouldn't be late paying a bill for a doctor's visit or your electric bill. Landlords check credit to determine if you'll reliably pay your rent. Employers often run credit reports on new hires. And insurance companies look at credit histories to determine rate classification.

What is a good credit score?

As you can see from the previous section, a credit score is not just an arbitrary three-digit number.

• Poor credit scores range from 300–579
• A fair score is between 580–669
• Good scores are found between 670–739
• A very good credit score is from 740–799
• And an exceptional score is 800 and above

6 ways to maintain a good credit score

Even if your credit score is good, don't get lazy about it. Different lenders have different standards, and missing a payment or even opening (or closing) a rarely used credit card can really impact a credit score. So, once you build your credit and get it to what's considered a “good” score, you must do everything you can to keep it there.

Here are 6 good credit habits to develop:

1. Make payments on time. Doing so builds your payment history and shows that you're a low-risk borrower.
2. Keep credit card usage below 30% of your available limit. Credit scores will nosedive if you constantly max out your credit limit or can't make on-time payments after doing so.
3. Don't always pay off your balances in full. If you pay your cards off every month, there's no history of you having paid down a balance. That's important, too.
4. Don't open too many new credit cards or apply for multiple loans. Retail credit cards often offer a small discount if you open an account. It sounds tempting, but steer clear. Each time you open a new account, the lender makes a hard inquiry to get your credit report. This can introduce some uncertainty to your credit history — maybe you're shopping for credit, have been declined repeatedly or are looking to access a bunch of credit because you are in a challenging financial position. And if your credit score gets dinged, it can drop slightly.
5. Don't close unused credit cards. Keeping a credit card open – even if all you do is pay the annual fee on it – shows how long you've been managing credit. Closing unused accounts remove these instances from your credit history and can reduce your credit score.
6. Monitor your credit score. Go to your bank or annualcreditreport.com for a free annual credit report. You can check your credit score via a soft inquiry (an inquiry that will not bring down your credit score) and get your bearings without getting dinged.

Talk to a local loan officer or apply online

If you're a prospective first-time homebuyer and your credit score is in good standing, reach out to one of our local loan officers to discuss which mortgage would be best for you.

Or, if you're ready to get started, apply online today!