The Psychology of Spending – Feeling At Home With Buying A Home
It is the quintessential American coming-of-age story: buying your first home. You’ve probably shared your enthusiastic dream with your spouse or loved ones, started budgeting for a down payment, and perhaps even started touring homes.
Absolutely nothing should stand in the way of your date with real estate destiny.
As you begin to research and strategize about making your dream a reality, you may have come across the classic pitfall and gateway to financing grief: the dreaded low credit score. You and the banks stand on common ground when it comes to hating less-than-stellar digits.
Fair or not, your credit score is one of the preeminent factors in deciding if your mortgage underwriters will say “yay” or “nay.”
It’ll Buff
Thankfully, low credit scores are not forever, and they are not out of our control. A credit score is a direct, mathematical reflection of your perceived risk or responsibility when it comes to managing lines of credit.
While the algorithm behind your credit score can seem nebulous or hard to understand, the key takeaway is that financial institutions not only want to know your financial habits; more importantly, they want to know what you’re doing to better them.
Failing To Plan Is A Plan To Fail
While there is no shame in having a rough credit score, you don’t want to stay there. Getting where you want to be will require some diligence and a healthy dose of self-reflection, but the relief you will feel when that mortgage preapproval letter comes through will be well worth it.
Today’s credit score is the shadow of yesterday’s spending, so unless something changes, you’ll be stuck spinning your wheels. Thankfully, there are tips and tricks to understanding the psychology of why we may spend the way we do, and the key to unlocking higher credit scores isn’t far off from there.
Understanding The “Why?”
Humans are complex creatures with equally complex habits and tendencies. When it comes to our spending behaviors, we must understand that factors such as anxiety, overconfidence, and the concept of out-of-sight, out-of-mind all play into potentially poor performance.
You have financial responsibilities; we all do. The critical difference between those with low credit scores and those with a score of 800+ is often found in simple matters of planning, timing, and spending discipline.
Leveraging your subconscious reasons for why we spend the way we do will allow you to supercharge your new credit-building behavior.
Factors At Play: Credit-Building Behaviors
Lenders and credit agencies love to charge you interest, but they also love to get their money back. Here are five steps to raising your credit score:
- Make payments on time
Credit agencies like to see that you use their services responsibly. Making payments on time not only physically returns capital to your lenders, it demonstrates foresight, planning, and self-control: ideal characteristics of safe borrowers.
When in doubt, the old adage “to he who is faithful with little, much will be given” applies.
- Use your credit card like a debit card
Simple best practices hijack our psychology, in a good way! By checking your accounts, budgeting often, and only spending what you can immediately repay, you never risk accruing exorbitant interest and fees.
It’s okay to be a big spender, as long as you are a big and timely payer.
Equally important, by never having a leftover or “revolving” balance between credit statements, you effectively turn your credit card into a score-building machine.
- Delete your credit card balance
When applying for new lines of credit, such as a mortgage, lenders want to see that you are ready and poised to start paying off principal and interest. Having a large, lingering credit card not only hurts your credit on its own merits, but it damages the all-important debt-to-income ratio lenders look at when preapproving your mortgage.
There are so many benefits to maintaining a clean slate on your credit card balance. Your cost-of-living decreases when you aren’t paying 20% or 30% interest. You will be empowered and encouraged to stay on the straight and narrow as you see your credit score steadily increase.
Soon, your homebuying dream will come true!
- Increase your credit limit
This seems counter-intuitive but bear with me here… The end goal is not to utilize more of your available credit, but rather to use less. Credit agencies look at how close you come to maxing out your credit as a percentage. Using your credit often is okay, as long as you don’t exceed 10% of your credit limit between payments.
As an example, say you charge your rent to your credit card, $2,000 a month, paid down to $0 before each statement closes. That’s well and fine, but if your credit limit is $10,000, you are now at 20% utilization of your available credit, and lenders start to get antsy.
If you can increase your available credit to $25,000, then a $2k balance only gets you to 8% of your limit! You can now repeatedly spend and pay off up to $2,500 during each statement period without hurting your credit, as long as you don’t exceed that balance at any given time.
- Minimize new credit inquiries
New credit inquiries are a necessary evil of applying for a mortgage, but proceed with caution. We both know you are responsible, but too many official credit score pulls can make you look like a desperate borrower who is biting off more than they can chew.
This goes for new credit cards and loans alike.
Try to research rates and make some phone calls to mortgage brokers beforehand. Leverage what is referred to as a “soft pull,” where lenders take an unofficial glance at your credit history. Then, you can feel confident in only applying for a mortgage preapproval when you like what you see.
Secret 6th – Your Credit Score’s Ace In The Hole
There is one final step to achieving a high credit score and securing a mortgage on your dream home: a qualified credit repair agency.
The specialists at Cooper’s Credit Consulting International have the drive and expertise to guide you through a boutique credit repair experience. Be it advice, recommendations, or a full-on psychology of spending game plan, Cooper’s Credit Consulting will get you to where you want to be.
A lot goes into an outstanding credit score and having an expert to guide you through the process is an invaluable asset on your journey. When you can finally turn the key to the house of your dreams, you’ll look back and be happy that you connected with us today.
Supercharge your credit score by visiting our website right now!