4 Things You Need Before You Buy A Home

Many factors go into whether it makes more sense to buy or rent. Here are four things you should have before homeownership. If you have them, buying may be a smart move.

1. An Emergency Fund: If you have avoided or paid off debts, your credit is healthy and you are saving for retirement, you may feel good about your financial situation. Before buying a home though, it's important to go another step further: Focus on building up an emergency savings fund.

4 Things You Need Before You Buy A Home

While everyone should really have an emergency fund to cover unexpected costs, it's especially important to homeowners. This should be in addition to the money you plan to use as a down payment. If you have enough cash to cover three to six months of your living expenses, you are much more prepared for homeownership. This way, in case your steady income is interrupted, you can still afford mortgage payments while you get back on your feet.

2. A Budget: A track record of maintaining a budget can be a good sign. If you already have a budget, try adjusting it to fit your new financial life as a homeowner before you buy. This should include mortgage payment, utility bills, homeowners insurance, property taxes, maintenance and upkeep costs. It's a good idea to even try living on that new mock budget for a few months. If you can do that comfortably, it may be a good time to buy.

3. A Steady Income: With mortgages usually 15 to 30 years in length, buying a home is a serious long-term financial decision. When calculating how much house you can afford a consistent income that covers monthly payments and miscellaneous home expenses is important. You may want to consider your other goals beyond buying a home. This may include how your financial situation will be affected if you plan to go back to school, start a family or change careers in the near future.

4. A Good Credit Score: When you go to a lender to apply for a mortgage, they will also look at your credit score in addition to your income. It's important to know where you stand before you actually apply for the mortgage, since there may be incorrect information on your credit reports that you can correct. And since your credit score will be a major factor in determining not only the interest rate you'll qualify for, but also whether a lender can even lend to you. (You can check your credit reports for free once a year -- here's how -- and you can see two of your credit scores for free on Credit.com.)

How To Establish Credit With A Secured Credit Card

Establishing good credit with no credit history can seem like a daunting task, but obtaining a secured credit card is one option that can help you build a strong credit foundation if managed responsibly.

Secured credit cards vary from traditional credit cards in a number of ways, the first being that they require cardholders to put down a security deposit to open the account. The deposit, which serves as collateral in the event that you cannot make the payment, is generally equal to your credit limit. This means if you put down a security deposit of $200, your credit limit would be equal to $200. Keep in mind that secured credit cards may carry fees and initial account setup costs, which will be deducted from your available credit limit when you open the account.

How Revolving Utilization Impacts Your Credit Score

A key factor in your credit score is something called revolving utilization. Each of your credit cards is scored one at a time and then again collectively.

Every credit card account has a credit limit, the most you can charge with the card — and a current balance, the amount you owe on a card.

To determine your utilization, divide your secured card's current balance by its credit limit. Then multiply that number by 100.
Let's look at an example. Let's say you have a $300 credit limit and you have a current balance of $15.
Divide 15 (your current balance) by 300 (your credit limit) and you get 0.05. Multiply 0.05 by 100 and you get 5 percent. You're using 5 percent of your credit limit. Your revolving utilization is a healthy 5 percent.

Thirty percent of your FICO score is based on revolving utilization. The lower your revolving debt utilization, the more points you'll get on your credit score and that's why charging no more than 10 percent of your credit limit in any month is such an important guideline, especially when you're looking to boost your credit as quickly as you can. In contrast, making a large purchase on a card with a low credit limit will actually hurt your credit. Let's say you charge $275 on a secured card with $300 credit limit. Charging so close to your credit limit will deduct points from your credit score, and that's even if you pay your balance in full that month.

Since using a secured card is all about building credit, you'll want to keep those purchase amounts as low as possible.

After six months to a year of responsible use with a secured card, your credit score will improve enough that you may be eligible for better card offers, including unsecured cards that don't require a deposit.

Your secured card issuer may offer you an unsecured card, and if it doesn't be sure to ask for one. And don't be afraid to shop around. There are deals are out there, and you and your improved credit deserve a good one.

Using Secured Credit Cards To Build Credit

Secured credit cards can build your credit. Building up your credit has become even more important over the past few years as credit is harder to come by. Secured credit cards can help people with little credit history build credit and even save some from bad credit.

When lenders look at a credit report, one of the things they want to see is that you have a history of repaying loans in a timely manner. If you've never taken out a loan before or have only been using credit for a short time, lenders often lack the information they need to decide how creditworthy you are. In cases like this, a secured credit card might be your only option.

In the same way, if you had a rough period where your bills went unpaid or were only paid sporadically, it can be difficult to convince lenders that you are going to pay off any new loans. If you do manage to get a loan or credit card while having these black marks on your credit report, you will likely have to pay high fees and high interest rates.

Rebuilding your credit
There is a way to build -- or rebuild -- your credit. A secured credit card works like a debit card. Once you are approved, you make a deposit into an account linked to this new credit card. The card you receive will have a Visa or MasterCard logo on it, but you will not be able to charge more than the amount you previously deposited onto the card.

Over time, as you continue to make payments and stay within your credit limit, you are building credit history and improving your credit score.

Be a careful consumer
Some secured credit cards have fees. Also, ensure the card issuer reports your account to at least one of the three main credit bureaus so it can help improve your credit score. It is important to research the card the same way you would an unsecured card. Also, check whether your current bank or credit union might have a secured credit card to offer you.