How Cash Is Delaying ADULTING: All About Credit Scores
Turns out a credit score is an essential part of being an adult.
Let me explain …
6 months ago, aged 32 I applied for my first mortgage.
I thought that all I needed to seal the deal was a deposit, proof of employment or a steady income, and a history of always paying my bills on time.
I have never been in debt, never owned a credit card, or taken out a loan – I was sure I had everything it takes for lenders to give me the money.
I was wrong – I was denied a mortgage because my credit score was too low!
Credit score? What is that?
How can I have a low credit score if I’m so good with my money?
Little did I know that by using cash (i.e money I have actually earned) to keep myself from building up debt, I have also put off some aspects of adulting, like borrowing money for a home?
Turns out that only spending the money I’ve earned, is a problem when applying for any type of loan 🤔
You see, spending my own money doesn’t help with building a credit history or boosting my credit scores.
I had no idea! 😳
But it makes sense if you think about it:
Lenders don’t care about how good you are with your own money, they want to see how good you are with the money that doesn’t belong to you– i.e credit cards, loans, etc.
Otherwise, how can they be sure you will be good with the money they lend to you?
A mortgage is one of the biggest financial transactions you’ll ever make, so lenders must be sure about your financial background before giving you a big sum of money.
In my search for answers about credit, this is what I found …
What is a credit score?
A credit score is a numerical value that is used by most lenders and finance providers to determine how good you are at borrowing money.
You are automatically given a credit score of 0 when you turn 18.
Credit scores range from 300 to 850. But what is considered a good credit score?
➤ Bad: 300-579
➤ Fair: 580-669
➤ Good: 670-739
➤ Very good: 740-799
➤ Exceptional: 800-850
Your credit score can go up or down depending on how well you have maintained financial payments for such things as your mobile phone, credit cards, loans, and more.
Why are credit scores so important?
Lenders will want to see some evidence (i.e previous experience) of reliability when paying off debts.
A healthy credit score tells a lender that you are not a risk, so they accord you all the perks that come with borrowing money, like better interest rates and other terms.
Think of it as your financial CV – the better it looks, the more attractive an applicant you’ll be.
Even though debit cards can have credit card functions (i.e overdraft), they do not get reported to the credit bureaus and, therefore, have no impact on your credit score.
Although taking out credit may feel counterintuitive or even stupid (if it’s not your thing), it’s the easiest and quickest way to build up your credit history and prove to the lender that you are an experienced and responsible borrower.
So, what I’ve come to realise is that avoiding credit isn’t a solid strategy if you’re looking to improve your score.
Shop around before an important financial decision
Whether you’re looking for a mortgage, car loan (or anything else that requires your credit score to be good) – always shop around.
Because not all loan fees are created equal.
Thankfully there are now sites like moneysavingexpert.com that help people manage their finances.
Taking out a loan or buying a car are big life-changing decisions, meaning you should take extra care researching them and making sure they’re the right decisions for you and your wallet.
There are also free financial calculators like calculator.me that have everything from Mortgage and Auto Calculators, to Savings and Financial Planning Calculators all in one place.
For example, a Mortgage Calculator will show you monthly mortgage payments based on the principal borrowed, the length of the loan, and the annual interest rate.
Once you have calculated payments, click on the “Create Amortization Schedule” button to create a report you can print out when you speak to your broker.
The bottom line:
Savvy consumers who do their homework before selecting a lender will end up well-positioned to make the best financial decisions.
How am I building my credit score atm to buy a home?
Since I was denied a mortgage 6 months ago, my broker advised me to get a credit card and use it for everything for the next 6 months and then reapply for a mortgage.
She also recommended paying all my standing orders like rent, bills, Netflix, Spotify, and gym subscriptions with a credit card.
The more I spend and pay back on time, the quicker I can build up my credit score and prove to my mortgage lender, that I’m someone they can trust with their money.
Annoying? Stupid? I know.
Welcome to adulthood that doesn’t make any sense 💁🏻♀️
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