How to Save For A Home: Start with Your Credit Score

HomeBudgeting and Saving

Executive summary

Steward was recently featured in Real Simple with actionable advice for those looking to make home purchases soon, particularly in today's hyper-competitive housing market.

The TLDR: If you're looking into how to save for a house, boosting your credit score is a great, and often forgotten, first step. Hold the phone - why are we talking about credit when you're figuring out how to save for a down payment? A boosted credit score can help you lock in the best loans and interest rates for  a big purchase like a home, lowering your "savings hurdle" for your initial down payment and ongoing mortgage payments.

You can read the full article here and find actionable plain-English advice on what is a credit score, why it's important, what score to shoot for, and how to up your score, below.

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Table of contents

Written by
Ami Shah

Ami Shah is the CEO of Steward, a personal finance tool helping mid-career professionals to make the most of their money by investing smarter and saving on taxes, with minimal time and effort.

She's a Certified Financial Planner®, Harvard Business School and Harvard College grad. She served as a wealth and asset management consultant at McKinsey & Company and as a white-glove wealth advisor to ultra high net worth families. Ami started Steward to bring the clear, structured, and evidence-based set of rules white-glove wealth advisors use with ultra high net worth clients, to more people beyond the 1%.

More about
Ami Shah

What's a credit score and how does it relate to saving for a house?

Before we dive in on improving your credit score, let's break down what a credit score is in Plain-English, and why it's important when you're saving for a house.

Your credit score (often called your FICO score because it was created by the Fair Isaac Corporation) is a single, easy-to-read number between 300 and 850 that represents your credit risk to lenders. Think of it like an SAT score for the credit industry.  The range determines whether or not your score is solid — but a good rule of thumb is the higher your credit score, the better off you are.

Credit Score - What does "Good" Look like?

Why is a credit score important?

A. It could save you up to $100,000+ on buying a home.

The chart below shows how various credit scores can adjust how much you'll pay on your mortgage. APR's have come down significantly since then (nice!), but the delta in interest rates for low vs. high scores still holds!

Source: MyFico.com. Data calculated in June 2017.

B. Knowing your score, let alone improving your score, sets you apart from the average American

A study from Princeton found that as many as 34 percent of Americans have never even checked their credit reports. That means 112 MILLION AMERICANS have never checked their credit score, despite it being free to check each year, and despite the significant savings (above) that checking and improving your score offers. You can get your credit score for free at creditkarma.com, or pay a small fee to get it at myfico (slightly more accurate). It's easier to manage something you can measure.

What's a credit score based on?

Here's how your credit score breaks down, in priority order.
- 35% payment history: How reliable you are. Late payments hurt you.
- 30% amounts owed: How much you owe and how much credit you have available, aka your credit      utilization rate
- 15% length of history: How long you’ve had credit)
- 10% new credit: Older accounts are better, because they show you’re reliable.
- 10% types of credit: For example, credit cards, student loans. Varied is better.

The big kahunas here are how reliable your payments are and how much you owe.

Source: Experian - one of the major credit scoring agencies

What credit score should I personally be shooting for?

This depends on where you are in your wealth-building journey, specifically - your age and your income.

Age: The average credit score looks very different between age groups. This is structural, and not something to beat yourself up over! One of the biggest components of your credit score is your payment history, so older people tend to have higher credit scores on average simply due to more years of payment history under their belts.

Average Credit Score by Age Group. Source: Experian

Income: If your household earns more than $86,000 each year (20%+ more than the median American household at ~$70,000, according to the US census), you're solidly in the "high income bracket". If that applies to you (a) Take a moment to pause and pat yourself on the back...that can be easy to forget in the depths of the rat race (b) I'm going to hold you to a higher bar! If you're above average on income, you can aim to be above average on credit score too - specifically above a 774 score. That's the average credit score of folks in the "high income" bracket according to the New York Federal Reserve Bank, which broke down "average" credit scores by income bracket (see chart below).

For more context on the NY Fed's chart, they define:
- Low income: Up to 50% of the median income ($35,000)
- Moderate income: Greater than 50% and up to 80% of the area median income ($35,000 - $56,000)
- Medium income: Greater than 80% and up to 120% of the area median income ($56,000 - $84,000)
- High income: More than 120% of the area median income ($84,000+) 

Average credit score by income-level. Source: Federal Reserve Bank of New York

How do I up my credit score to optimize my home purchase and mortgage interest rates?

Let's start here with a bigger truth. You can ALWAYS make your credit score better. Here are actionable ways to do it, by decade...as a rough proxy for where you are in your wealth-building journey. Feel free to "skip a grade" if you want to up the bar for yourself.

In your 20s:

Know your number: Get your credit score for free at creditkarma.com, or pay a small fee to get it at myfico (slightly more accurate). It's easier to manage something you can measure.

Find an  accountability partner: More Americans are willing to reveal details of sex lives than their credit card debt! Share your credit card debt with a friend, and hold each other accountable on reducing your numbers over time. 

Set up auto-pay for your credit cards: Ensure you pay of your cards in full (not the monthly minimum) every month. Or, if you're in debt, set up an automatic payment for the largest amount you can afford. This is the single most important thing you can do to improve your credit score, since your debt payment history is the biggest contributor (35%) to your credit score. Here's an example of what that looks like for Chase:

Example: Setting up auto-payments for your credit-card with Chase

In your 30s:

If you have debt, start paying it off: The second biggest driver of your credit score (30%) is your credit utilization rate, or in plain-English how much you owe vs. how much credit you have available. Let's break this into bite-size pieces...to make it less scary and ominous.
- First, give yourself one week to figure out how much you owe, what your payoff dates are, and how much your interest rate (APR) is for each debt.  You'll already be ahead of the curve if you figure this out. Over 75% of US households are in debt, but don't know how much they actually owe!
- Second, call your credit cards to negotiate down the APR, telling them that you're going to start paying  it off more aggressively about paying your debt, that other cards are offering you rates that are half of what they're offering, and asking for them to lower your rate by 40-50%.
- Explore restructuring your student loan payments to see if that opens up savings for you. You could use a service like Sofi or Earnest. No association here, all the more power to you if you can find a better deal! 
- Set up your automatic payment to be greater than the monthly minimum. You can use an online calculator like unbury.me or bankrate.com to play with different  strategies of paying down debt, to see which works best for you.

Example of a Debt Paydown Online Calculator - unbury.me

Once you're debt free, apply for more credit: Request credit limit increases every 6-12 months. You      could tell your credit card company "I checked my credit and noticed I have a pretty good 740 credit score. I've been a loyal customer for the last 4 years, and would like to request a credit limit increase."

In your 40s

Preserve  your longest-held card: The third highest driver of your credit score (15%) hinges on your length of credit history. To avoid having your longest-held card, which you now might rarely use, shut down...set up an automatic payment on it. For example, have your monthly Netflix subscription or your Amazon Prime subscription automatically get paid from this card - that'll do the trick.

Trim your  other credit cards:  As time passes, it's easy to lose track of that Macy's card you set up a decade back and risk missing payments. Shoot for having no more than 2-3 credit cards. The average American has four credit cards, and you're above-average!

What's a credit score vs. a credit report?

Two sides of the same coin - evaluating your credit-worthiness. A credit score is a single number (the quantitative) and the credit report is the written voice over behind the numbers (the qualitative). So while we're on the topic of credit scores, it's worth looking into the second main component of your credit - your credit report. A credit report is an all-inclusive report detailing your credit history for potential lenders. It’ll include information such as your: loan history, accounts opened and closed, payment history, and credit balance.

Similar to getting an annual free credit score, you’re entitled to a free credit report each year, per the Fair Credit Reporting Act. Generally, though, you’d want to request one of these if you think you’ve been unjustly denied anything due to your credit. If that's the case, there are three major companies that will provide them for you: Equifax, Experian, TransUnion. or annualcreditreport.com . It doesn’t matter which one you use, they’ll all be able to provide you the same information.

Conclusion

Ultimately, the key point is that if you're looking into how to save for a house, upping your credit score is a great, if often forgotten, first step. It will lower how much you'll be spending on the house. There are many ways to do this, and the key spots to start are 1) Figuring out what your score is 2) Improving your payment history and 3) Reducing the outstanding amounts you have owed.

More Resources

Curious to learn more? Here are some extra resources, alongside the tools we mentioned in the article.

Annual Credit Score Check: You can get your credit score for free at creditkarma.com, or pay a small fee to get it at myfico (slightly more accurate).

Annual Credit Report Check:  Equifax, Experian, TransUnion. or annualcreditreport.com

Debt Paydown Online Calculators:  unbury.me or bankrate.com

Credit Score by location: An interesting piece from Forbes that lets you map your average credit score not only by your age or income, but also by your location.

How to save for a house:  Steward is a financial planning tool that helps you make the most of your money. We help our users determine the best investment and savings strategies to save for a house, and other life milestones (e.g., kids' college, going back to school, financial freedom etc.) in a tax-efficient way. If you're interested in a personalized to-do list for how, where and when to invest and save on taxes in plain-English, with minimal time effort, we'd love to welcome you to our early access community. You can sign up for our waitlist (with 600+ other families and counting!) here.

     
     
     

Written by

Ami Shah

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