How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 1
During my twelve years in the mortgage business, I have often been asked how to build credit before buying a home. In fact, the reason I became a credit expert initially was to help my clients learn how to buy a home. But I quickly learned that buying a home isn’t the only reason to have great credit. If you want the best auto loan, you should have great credit. If you want the best credit card offers, great credit is the key. In fact, if you just want the best premium on your car insurance, you should have a great credit score.
Over the next eight weeks, I’m going to outline my seven-step plan on how to build credit. Here is a summary of what to expect over the next eight weeks:
- Part 1: How to Build Credit Before You Buy a Home or Make Another Major Purchase. During this week’s lesson, we will discuss where to get your credit report and credit score.
- Part 2: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Next week, we will take a look at Step Three of my book, 7 Steps to a 720 Credit Score. In this step, we verify the accuracy of your reported credit limits to make sure that you receive the best credit card score you can get.
- Part 3: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Next, I will explain Step Two of my book: Have at least three revolving credit cards.
- Part 4: How to Build Credit Before You Buy a Home or Make Another Major Purchase. This blog entry will explain Step One of my book: Keep your credit card balances under 30 percent of your credit limit. This blog will be especially important for people who need to know the facts of bankruptcy as it will explain how to rebuild credit after a financial disaster.
- Part 5: How to Build Credit Before You Buy a Home or Make Another Major Purchase. This is dedicated to Step Five of the book: Remove high priority errors from your credit report.
- Part 6: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Part 6 is for those who have struggled to pay their bills on time. Here, I will teach you to negotiate before paying a bill in collection.
- Part 7: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Part 7 is dedicated to the most important section of my book, Step Seven. In this step, we create a structured plan to protect your credit.
- Part 8: How to Build Credit Before You Buy a Home or Make Another Major Purchase. Finally, we will jump back to Step Four: Have at least one helpful active or paid installment loan on your credit report.
Moving on to this week’s lesson …
Part 1: How to Build Credit Before You Buy a Home or Make Another Major Purchase
If you want to learn how to build credit, you should start by taking a couple of preliminary action steps:
- Run your free credit report from www.AnnualCreditReport.com.
- Buy your credit score, but not from AnnualCreditReport.com. You will need to get the right credit score. Let me explain what I mean.
As I explain in my book, credit-scoring bureaus (Experian, Equifax, TransUnion) provide four different types of credit scores: the consumer score, the auto formula score, the Rental Score, and the FICO score. At least 90 percent of lenders use the FICO score, and 0 percent use the consumer score. Let me repeat that: 0 percent use the consumer score.
When you purchase your own credit score from most online sites, you will almost always be buying your consumer score. But it’s worthless—total garbage because not a single lender will ever review your consumer score. The consumer score is much different than the score that the lenders use to determine what interest rate they will give you.
Let me give you an example. One day I went to the government’s website, www.AnnualCreditReport.com, ran my credit report, and paid for my credit score. (Many people don’t know that you can get a free credit report from www.AnnualCreditReport.com, but not a free credit score. On a side note, I think this is completely unfair and misleading to the consumer.)
Speaking of unfair and misleading, www.AnnualCreditReport.com provides the consumer score. That’s right: Hardworking Americans spend their money on a worthless credit score. And let me illustrate just how worthless this score is. The same exact day, I ran my credit score through my mortgage company, which uses the FICO score. On the same exact day, my FICO score was 237 points lower than my consumer score.
227 points! If I had relied on my consumer score, I would have thought my credit score was 237 points higher than it actually was. You can see why this is a big problem.
I see this all the time! People come to me for loans and tell me they have a great credit score. But in reality, they have a great consumer score, but not a great FICO score. They have a high consumer score, which no lender will ever see, so they have an artificial sense of security regarding their credit score. Then they are shocked when their loan terms are less-than-desirable.
That is why I tell people to only buy their scores from one location: http://www.720FICOScore.com.
When you go to http://www.720FICOScore.com, you will have to pay $31.90 for your score, but it is worth it because you will see the same score the banks will see. You will have an accurate picture of your credit score.
When you buy your scores from www.720FICOScore.com, you will receive both your TransUnion and your Equifax score. For now, don’t buy your Experian score as Experian no longer provides consumers with a FICO score.
If money is an issue right now and you do not want to buy your credit scores, that is okay, For now, just download your free credit report. Eventually, you will want to look at your score; for now, we will start reviewing your credit report and looking for problem areas.
That’s it for this week! At most, this will take you 20 minutes. Come back next week for Part 2: How to Build Credit Before You Buy a Home or Make Another Major Purchase.