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November 23, 2015

Build Your Credit in Six Easy Steps

Danny Gardner
Danny Gardner, VP Single-Family Affordable Lending and Access to Credit

Let's talk about the spring homebuying season.

I know, I know – you haven't even set your holiday dinner table yet. Why on earth would anyone want to be thinking about the spring homebuying season NOW?

Because if you're considering buying a home next year, it's never too early to be thinking about your credit. Having good credit is no accident. It's the result of discipline and planning. Start today, and by the time you're ready to become a homeowner, your good credit will pay off with better loan terms, lower interest rates, and greater financial opportunities in the future.

Why Good Credit Matters

A good credit history increases the confidence of lenders and creditors when they loan money to you. When they see that you've paid back your loans as agreed, lenders are more likely to extend credit again. With good credit, you can borrow for major expenses – like a home – and you can borrow money at a lower cost, ultimately saving you money.

Your FICO credit score is one tool lenders use to gauge your creditworthiness (see sidebar: "What Exactly IS a Credit Score?"). FICO scores can range from about 300 to 850 points – and your goal is to aim high. How high? Well, to give you an idea how much having good credit matters, in the third quarter of 2015, the average borrower of a loan bought by Freddie Mac had a FICO score of 751. That represents a slight drop since the peak of the housing crisis, but still means we're in a lending environment where having a good credit score is incredibly important.

Six Steps to Take Beginning Today

Whether you're hoping to buy a home in spring 2016 or looking further out, here are six steps you can take between now and then to help build and maintain good credit.

What Exactly IS a Credit Score?

Your credit score is computer generated using a formula that gives a snapshot of your creditworthiness, predicting how likely you are to repay your debts. The most common formula is from the Fair Issac Corporation (FICO). They calculate your credit score using the following factors:

  • Payment History (35 percent). Do you pay on time? Ever filed for bankruptcy or had a foreclosure?
  • Amounts Owed (30 percent). How much do you owe to creditors and lenders?
  • Length of Credit History (15 percent). How long have you had credit?
  • New Credit (10 percent). Have you applied for a lot of new credit – meaning you're potentially taking on too much debt?
  • Types of credit used (10 percent). Do you show a "healthy" mix of credit types?
  1. Open a checking and savings account. When you open a checking and savings account, try to stay above your minimum balance, never bounce checks, and make regular deposits.
  2. Use credit cards carefully. Credit cards are convenient and easy to use, but using them recklessly can hurt your credit. If you allow your credit cards to reach high, unpaid balances, they can cost you hundreds or thousands of dollars in interest alone. On the other hand, if you pay them in full and on time each month, credit cards can help you build excellent credit and reap the benefits that follow.
  3. Establish credit independently. It's important for both partners in a marriage or a relationship to establish their own credit to help achieve financial goals and to protect against unforeseen circumstances like death, divorce, or other life changes. Partners should regularly discuss household and personal expenditures to ensure that neither has an excessive amount of charges that cannot be repaid.
  4. Honor your promise to pay. It's essential that you honor your promise to make your credit payments on time and in the amounts scheduled. That includes your credit cards, auto and student loans, utility bills, medical bills, etc. Contact your lender or creditor immediately if you are having trouble making payments.
  5. Know what's in your credit report. Check your credit report at least once each year at to ensure its accuracy (Federal law requires that the three consumer credit reporting companies give you a free credit report annually – you just have to ask for it). If you’re planning a large purchase, check your credit report before it’s time to buy to avoid any surprises and to allow you plenty of time to correct any errors.
  6. Take steps to restore your credit if you've had a financial setback. Contact former creditors with whom you've had a good payment record – they may be willing to help you re-establish your credit. You don't want to acquire too many credit cards, so carefully review any credit card offers you receive. And above all, avoid disreputable credit "repair" companies that promise a quick and easy fix – they could end up costing you money and dragging you further into debt. Instead, take advantage of the services provided by a local Consumer Credit Counseling Service or a HUD-approved Housing Counseling Agency.

Additional Resources

  • Freddie Mac's CreditSmart® curriculum is a consumer guide to better credit, money management, and responsible homeownership. It's online, free, and available in English and Spanish (additional languages are available in print).
  • Freddie Mac's Borrower Help Centers and Borrower Help Network assist house-hunters across the country in navigating the homebuying process.
  • Housing counselors are trained professionals who help millions of people every year – at little or no cost. They can help you improve your credit, manage your debt, and get ready to buy a home. HUD maintains a list of approved housing counselors. Another great place to get this information is the National Federation of Credit Counseling organization, or NFCC. Consumers can find out more at
  • My Home by Freddie MacSM is our online guide to the homebuying process and successful homeownership.
  • Beware of fraud! Learn about common mortgage scams and get advice before you buy.
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