I Am Empowered - I am the National Urban League

Anna Cuevas is the National Urban League's new Consumer Advocate, as part of our 2015 Financial Empowerment series. Learn more about Anna here.
 

Upon graduation from college, you’re ready to get a full-time job and start earning money. Being an adult kicks in, complete with the income, bills, and responsibilities as you take the first steps into your future. This is the perfect time to set yourself up for financial security. It is also a time when you will have access to credit and larger purchases, such as your first home. Unfortunately, your education has not prepared you for these life events.

Credit is a foreign word to teens and young adults, and when they are able to access it, they don’t realize that credit can be a curse, if not used wisely. Too often, credit leaves them buried in debt, struggling to make ends meet, and is the reason they are unable to buy a new car or purchase their first home. Becoming financially responsible isn’t something that is taught in school or that comes naturally. The sooner you learn about financial responsibility and credit, the better your life will be.

Credit

You need credit. Everyone needs a credit history. It has an impact on your ability to obtain a job, rent an apartment, or buy a car or house. A good credit rating can lower your insurance rates and down payments for utilities and other necessities, while a poor credit rating can boost your rates tremendously.

As soon as you have your first job, apply for a major credit card. If that is not possible, get a secured credit card. This will begin to establish your credit history. The key to good credit is to pay your bills on time every month.

If you’re renting, make sure your rent is paid on time, as well. Landlords can report rent payments to the credit bureaus, and when it comes time to purchase a home, mortgage lenders will review your history of rent payments to see if you’re diligent about paying your housing costs on time. Even one late rent payment can have an impact on whether you are approved for a mortgage.

Order free copies of your credit reports annually and check it thoroughly to make sure there aren’t any discrepancies or inaccuracies.

Start Early to Prepare for Homeownership

You might not be ready to purchase a home just yet, but the sooner you follow the steps you’ll need to be approved for a mortgage, the better your financial situation and credit will be. Follow these suggestions now and before you’re ready to apply for a mortgage, and homeownership will be within your grasp sooner than you think.

1. Have three lines of credit in order to establish your credit history. This could include a credit card, a student loan, and an installment or automobile loan. You could even have three separate credit cards. The key is to have these accounts for at least one year and to make your payments on time. Don’t max out your credit cards, because mortgage lenders and the credit bureaus are more interested in how much of your credit limit you’re using. If you’re using most or all of your available credit, it will lower your credit score
    
2. Create a budget and live by it. The sooner you understand how to budget your money, the more financially stable you’ll be. Starting with your first paycheck, create a budget that includes paying your bills, savings, an emergency fund, and long-term planning.
    
3. If you have any delinquent accounts, pay them off before you apply for a mortgage or any new credit. Delinquent accounts are red flags that you are a high credit risk. If you have delinquent accounts and are able to receive credit or a mortgage, you will probably find that you are changed a higher-than-normal interest rate. Once you’ve cleared your delinquent accounts, wait six months before applying for further credit or a mortgage.
    
4. Save your money. Creating a savings plan and sticking to it diligently is one of the first things you should do when you start earning income. Not only is it a good practice that will make your life and finances much more stable in the years to come, but it also shows lenders that you are responsible. In addition, these funds will go a long way toward building a down payment for your first house, which will result in a lower mortgage and less interest.
    
5. When you’re almost ready to begin looking for a home, stop using your credit cards or other open lines of credit. Experts suggest that you avoid using credit whatsoever for at least 45 days prior to applying for a mortgage. If possible, pay off those credit cards altogether, but don’t close them—closing a major credit card can actually lower your credit score. It’s better to have a credit account that has a low balance and is not being used than to close one.
    
6. If you’ve take the above steps and are ready to explore homeownership, don’t jump in without doing some research. Understand the types of mortgages that are available and their terms. Low interest rates at the beginning are not always recommended, for some change over time and can double or triple. With a traditional fixed-rate mortgage, you’ll know what your payments will be all of the time. Don’t forget, too, to research local, state and federal incentives for first-time homeowners. A housing counselor can help you find those incentives and the best mortgage for your situation.

By setting yourself up now and taking the steps required to be approved for a mortgage, you’ll have be financially secure and responsible for whatever life brings your way. Then, when you do need credit, or are ready to buy your first home, you’ll have the peace of mind from knowing that you have the savings, credit history, and financial security that you’ll need.

Always speak to a housing counselor before buying a home. Their services are free, and they can help you understand the costs and responsibilities of homeownership, while also helping you obtain the best mortgage with the best terms.