How to build credit for a new home

While credit may not be part of your physical savings, it’s a common option for borrowers to pursue, especially for a big expense like a new home. According to 2024 data from the National Association of Realtors, 80% of recent homebuyers financed their home purchase in 2023. It’s highly plausible that utilizing a combination of your savings and credit can help make the home financing process easier for you.

As you pursue a home loan, what actions can you take to improve your credit score? In general, the following are just a few ideas that can move the needle in the right direction.

• Pay your bills on time. While this may be one of the more obvious methods of raising your credit, keeping a timely cadence of payments will help you stay in good standing with credit lenders, while late payments can negatively impact your score. Also, pay down your highest balances first in an effort to minimize the amount of interest you’re paying.
• Keep your credit balances low. Approximately 30% of your credit score is based on your credit utilization —or, in other words, your available credit. That means the quicker you can pay down your credit balance and can raise your available credit, the more positive impact it may have on your credit score.
• Diversify your credit. Keep your oldest accounts open and diversify the types of credit you open over time. While this may help raise your score, try to avoid taking on debt just for the sake of building credit.

• Too much credit activity. Avoid opening too many lines of credit within a timeframe of 12 months, as a burst of new account activity within a short period of time may negatively impact your credit score. Similarly, if you have too many recent credit inquires, that may drive your score down.
• Not enough credit activity. Conversely, a short credit history, too few revolving accounts, or no recent credit card balances may also skew your score in a negative direction. While you manage your credit, be sure to strike the right balance of activity to help keep your credit score in good standing.
• Maxing out your limits. Balances on revolving credit that are near the maximum limits may have a negative effect on your score. Be wary of your specific accounts’ limits and what consequences could arise from maxing out those limits.

Establishing good savings practices is an important part of building your wealth and feeling financially independent. Especially as you prepare to buy a home, your savings serve as an important resource to leverage alongside other financial methods.

If you’re looking for a saving strategy to implement quickly, look at putting a portion of each paycheck into a savings account. With electronic banking, you may be able to set a percentage of each paycheck to deposit into a savings account. Some employers may also offer a direct deposit option which automatically allocates a specific percentage of your paycheck into a savings account for you, so be sure to learn what your options are with your employer and with your banking institution.

Having trouble setting an overall budget to build your savings? Below is a potential budget you can pursue that considers essential costs, savings, and more flexible costs for entertainment and leisure. These percentages should be based on your total net income and will vary from person to person based on their life goals and commitments:

• Housing: 20-35%
• Food: 15-30%
• Transportation: 6-30%
• Savings: 10-15%
• Utilities: 4-7%
• Clothing: 3-10%
• Medical: 2-8%
• Entertainment: 2-6%
• Family necessities, like laundry or toiletries: 2-4%

As you can see, there is no “one good savings strategy,” but hopefully these tips help you understand what strategies work best for you. Dive further into your financial situation if you’re still wondering whether you’re financially ready to become a homeowner.