Considering buying a home? Wondering how to get started? Or when to start the process? You stomach gets all tight just thinking about purchasing what could be your biggest financial investment to date. Understanding the process and having a plan may remove some of those butterflies. The biggest key to a successful stress reduced transaction is to start early and reduce the chances of last-minute surprises.
Up to 1 Year Out from Purchas
- Check your credit report. If you have items on your report the earlier, you tackle the issue(s) the more time there is to raise your credit scores. You can check your credit for FREE through AnnualCreditReport.com, the only free online credit report authorized by Federal law.
- Check your FICO credit score. The FICO score indicates your creditworthiness and determines your interest rates and terms of the loan. The higher the FICO credit score the more options are open to you as a buyer.
- Reduce your outstanding debt. Get your outstanding debt (Credit Cards & Store Cards) below 30% of the approved limit on the credit account and if possible, get it down below 10% of the limit. Be sure you are paying on time and early if you must use the card, to keep it below these levels before reporting date. If you have a large number of cards and balances you might want to meet with a credit counselor, like Joe Camacho with Phenix Group to get a plan together.
- Saving! The higher the down payment you have the more options you have with mortgage companies. So, start saving what you will need now. You will need to prove you have had your down payment balances in your account’s months in advance of closing as proof of funds.
The above-mentioned items may mean a change of your spending patterns. You are going to want to look at cutting back on frivolous expenditures, expensive vacations and forgo luxury purchases at least until after closing. It is so sad to see someone do all this hard work, get approved for their dream home then go out and make a last-minute purchase of furniture or a vehicle. Then no longer be able to qualify for their home loan. It unfortunately happens more than you would think.
Around 6 Month Point Prior to Purchase
- Start researching you mortgage options. There are many different types of mortgages and first time buyer programs. We will expand upon these programs in future articles. Do research and find out the risks that can incur with different types of mortgages? At this point, you may want to sit down with a FREE consultation with Real Estate + Credit Professionals.
- Look into Typical Unforeseen Home Ownership Costs. These can include, but not limited to, Homeowners Associations (HOA) fees, Home Warranty Products, Special Assessment Zones, and Utilities Rates to name a few.
- Recheck you credit status and scores. Have you made the progress you need to qualify for a mortgage? If not, you will need to kick you credit repair into overdrive. At this point, you need to consider hiring a credit counselor, like Joe Camacho with Phenix Group to assist you getting to the scores you desire.
3 Month Point – Critical Credit Period
- You will need to reduce credit usage. FICO score is affected by how much of your available credit lines you have outstanding. Learn when your credit provider reports balances outstanding on your card to the bureau. This typically, does not correspond with your debt’s payment date. Try to pay down any balances before reporting date. Keep your balances below 30% and as close or below 10% if possible.
- It is very important at this point to not open or close any accounts. You are now close to starting the home buying process and these steps can have a serious impact on your credit scores. This is critical to remember even after you have a letter from your mortgage lender qualifying you for a home mortgage and up and to and including closing the transaction.
- Begin researching neighborhoods and real estate agents. What is considered a great neighborhood is going to be the items important to you like; distance to work, good schools, shopping, parks, activities and great amenities. We are adding this suggested task at the 3-month period, but nothing wrong about starting this process much earlier.
The “Home” Stretch – 2 Months Out
- You need to be very cautious during this period in having your credit pulled for any type of financial transaction. You should have considered the different mortgage options out there already and only have a limited amount of mortgage companies pull your credit report. However, if you are shopping mortgage companies do them in a short period of time and they will be counted as one pull
- Check mortgage rates and programs like 1st time buyer assistant programs. Know you FICO score to get mortgage rates, they don’t have to pull your credit to discuss rates with you
- Once you have selected your mortgage company you want to get prequalified for a mortgage. This way you know how much you can afford. Plus, you will need this letter for your agent to submit offers for you. The seller wants to know you can afford to purchase the home for purpose of reviewing and accepting the contract.
You should now be prepared with a better credit score, larger down payment and information on mortgages to go out and find your dream home to make a confident offer on! Good luck out there.
By: Bryan Shobe, JB Goodwin REALTOR®
Website: Real Estate + Credit Professionals
This information is Provided by: Bryan Shobe, JBGoodwin REALTOR®, Direct Line: (210) 753.4110 E-mail: [email protected], Texas Real Estate Salesperson License #701379. Texas Law requires all real estate licensees to give the following information about brokerage services: Texas Real Estate Commission Information About Brokerage Services:
Whether you like it or not, your credit is a reflection of you. It’s basically a snapshot of how trustworthy you’ve been with money in the past. Throughout your life, credit can affect many different milestones such as getting a job or an apartment. Also, when you choose to make bigger purchases such as a car or a home, credit can make or break whether you’re going to be willing to afford it. It’s important to realize how important credit before you can work on increasing your score as much as possible or look into credit repair. To learn more about how credit impacts your wallet, read on.
1. Your Rent
More and more apartment managers, landlords, and rental agencies review their tenants’ credit scores. When they look at your credit report, they are trying to find a record of fiscal responsibility (or lack thereof.) Negative information like missed payments can influence them to believe that you may not pay your rent on time. They might be looking to see if you have any large debts as well, which may prevent you from paying your rent. Having a low credit score means that you might have to find a co-signer, put down a larger deposit, or that your housing application might just get passed on altogether. Causing you to settle for an area that you’d rather not live in or pay more than you were planning to for rent.
2. Your Utilities & Cell Phone Service
As with your rent, having a low score may force you to have to get a cosigner or pay a large deposit on your utilities. Cell phone providers might ask to take a look at your credit history before giving you service. Also, if you have a lower credit score, you might miss out on deals that individuals with better credit scores are being offered.
3. Your Career
Even though you may not think it’s fair, the truth is that many employers check the credit reports of prospective employees as a part of the screening process. Some of the reasons why include assessing trustworthiness, discipline, and figuring out the potential for theft or embezzlement. It’ll often happen if a person is going for a high-stakes position, or if someone yearns to be in an industry that deals with money quite a bit (i.e. banking.) But, in the end, it’s a possibility that many people will face when they’re trying to get a new job.
By law, employers are required to have your written consent before they look at your credit history. And also, they might not see your actual credit score. In turn, they’ll see a modified credit report that could omit some details. Still, if your credit report involves a number of negative factors, it may be the thing that stands between you and getting the job that you have always wanted.
4. Student Loans
If you’re looking to continue your education, then finding a student loan might be a frustration instead of an ease. But, this depends on a couple of different factors. When you’re dealing with Stafford, Perkins, or PLUS loans they don’t rely on your credit score. But, if you’re planning on getting a PLUS loan, it requires that you don’t have an “adverse credit history.”
Private student loans are a completely different story. They, in turn, do look at your credit score when deciding whether to give you a loan or not. When it all comes down to it, the borrowers with the worst credit are going be offered loans with 5-6% more of interest than those with an excellent credit score. Sometimes, the rates are even higher depending on the lender. This means more money is going to come out of your pocket in the long run than someone who has already established an excellent credit history.
5. Your Mortgage or Car Loan
If you’re currently in the market for buying a house, one of the first things that you’re going to do is apply for a mortgage loan. If you are dealing with a terrible credit score, then you might not even qualify for getting any type of mortgage loan at all. Many lenders use your credit score as proof of your reliability as a borrower. If you’re dealing with bad credit, that’s definitely going to be a red flag for a lender that they might not get their money back if they lend to you. Even if you don’t have an established credit, you might not get a good deal for a loan as well because lenders are basically taking a bet on you.
Even if you do get approved, the loans that are available to you will probably have high-interest rates. In the long run, you’ll probably end up spending tens of thousands of dollars more than someone who has a much better credit score than you.
Car loans work the same way. If you don’t have a decent credit score, then you might not even have car loans available to you. If you do, you’ll probably end up drowning in interest for years to come. Having bad credit can not only stand in the way of your goals, but they can also cost you thousands of dollars in the long run due to interest.
The status of your credit can affect your wallet in many different ways. It can come between you and many of your life’s goals including getting a job, getting an apartment, and qualifying for an auto loan. Also, your credit can cause utility and credit card companies to see you as “untrustworthy” and keep the best deals from you as a result. Choosing to start building your credit means, inevitably, choosing a better life for yourself. Having good credit gives you the ability to choose the things that you want whether it is your job, your place to live, or your car. Choose today to work on bettering your credit, and give yourself the gift of choice.
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There are many intricate details that build your credit score. This includes the amount of new credit that you receive, the amount you currently owe, and your payment history. But, another factor that goes into your overall credit score is the number of times that it’s checked by specific institutions. Credit checks are put into two categories: hard inquiries and soft inquiries. It’s important to know how each type of inquiry affects your credit so you can have more control over your credit score as a whole.
Hard Credit Inquiries
Hard inquiries (often known as hard pulls) happen when someone is trying to decide whether to loan money to you or not. They are supposed to happen with your consent only. When you’re trying to apply for a student loan, an auto loan, or a home loan, credit checks from these affiliates companies will stick to your credit report. These credit checks do affect your credit score and can take off as much as five points from your FICO score. Mostly, they’ll have a minor, if any, effect on your credit score. Hard inquiries only stay on your credit score for about two years, and they often stop affecting your credit score after one.
If you’re trying to shop around for a credit card or a student loan, it’s best to not procrastinate and only apply for credit cards that you think you’ll receive. All those inquiries within a 14 to 45-day period are considered one inquiry on your credit report. So, if you’re looking to shop around, be sure to stay smart during your journey. But, having an excessive amount of hard inquiries might make you seem high-risk to lenders. Don’t let these facts keep you from shopping around for the lowest interest, but also don’t go crazy with your applying. Also, keep in mind that FICO gives a 30-day grace before loan inquiries are affected in your credit score. If you can minimize the number of hard inquiries that you have on your credit report, then it’s a good idea to do just that.
Soft Credit Inquiries
On the other hand, soft inquiries (or soft pulls) don’t affect your credit score at all. They’re utilized for a variety of different reasons often without your permission, including when credit card pre-approve you for loans. It wouldn’t be in their best interest to waste postage on a person that they would probably not accept, so they check their credit. Also, when companies do background checks, soft inquiries happen as well. Companies might check your credit as an indicator that you’re a responsible adult with good habits. Also, when you check your own credit score it doesn’t affect it at all. It’s often a common misconception that checking your own credit score will lower it, but that’s just not the case. Whether you’re getting your free yearly credit report from any of the credit bureaus or using an on-demand service like Credit Karma, they’re all recorded as soft inquiries. These types of inquiries might be included on your credit report, but that often depends on the specific credit bureau. You can check your credit score as often as you’d like.
Hard or Soft Credit Inquiries: More Information
There are certain situations that could involve either a hard inquiry or a soft inquiry. They include leasing a car, opening up a utility account, requesting a higher credit limit, and more.
If you’re not sure whether a credit check is going to be recorded as a soft inquiry or a hard inquiry, then it’s important to get in contact with the lender or financial institution. Being informed with it comes to your financial history is very important. Also, if there’s a hard inquiry on your report that you didn’t authorize you can get in contact with them and ask them to remove it. If they aren’t budging, then you can dispute them directly with the credit unions. It’s very important to keep the information on your credit score as up-to-date as possible to get the most honest report.
To best protect yourself against the effect of hard inquiries, it’s important to maintain a solid credit score in order to minimize the effect that a hard inquiry would have on your credit. Also, ask them if you can do a soft inquiry instead. It might be just as effective for you to pull on your own credit report, print it out, and show them instead of them doing a hard inquiry on your own.
Hard inquiries and soft inquiries are very different, but they’re both important to know when it comes to your credit. Hard inquiries happen with your consent, and they often affect your credit score in some way. Soft inquiries often happen without your permission, but they don’t affect your credit score. Knowing these two separate concepts gives you the best chance of taking control of your credit score and staying as fiscally responsible as possible.
Household debt is up… again. In fact, it’s been on a steady rise fiscal quarter after fiscal quarter since 2013. The total American household debt, as of March 2018, was 13.21 trillion. That’s right, trillions. No wonder so many U.S. consumers struggle with the slippery slope of bad credit. With the mountain of debt we seem to pile on ourselves, plummeting credit scores seem to be a foregone conclusion.
If you are one of the many badly indebted Americans, you’re not alone. A whole variety of feasible situations may have put you in the position you’re in now.
The first, and possibly most prominent reason for your low credit rating could be due to becoming one of the two million home owners watching their homes foreclosed upon in 2009 or every year since.
Or, perhaps you were one of the 1.41 million people who claimed bankruptcy in 2009 or one of the hundreds of thousands since. What once was a shame filled position to find oneself in, has become quite commonplace for millions of us, since the mortgage crisis and the Great Recession of 2007-09.
Even if you managed to make it through the recession without having to declare bankruptcy or give up your home, you may have had to make plenty of financial sacrifices that affected your ability to pay bills on time, thus negatively impacting your credit profile, causing your score to plummet.
Many of us took on new debt in an effort just to stay afloat through the use of additional credit cards or second mortgages. And now, all of these financial life rafts are losing air, causing you to sink in a sea of debt and bad credit.
The good news is, as a country, we have started the road to recovery with the recession finally firmly behind us. Many of us have the opportunity to catch our breath and begin to rebuild our credit.
How To Rebuild Your Credit
The very first thing you need to do is find out what your credit profile looks like. Get a free copy of your credit report, and then monitor your score. Look for inaccuracies in your report and resolve them with each of the three credit monitoring bureaus: Equifax, TransUnion, and Experian. Once you feel comfortable that everything listed in your report is accurate, get a hold of your score and monitor it regularly for changes.
Make Timely Payments
35% of your credit score is determined by your ability to pay your credit accounts on time. Even if you’ve been incredibly late in the past, every future move you make will impact your credit score. You may not be able to change the past, but you may be able to control the future. Every payment made on time translates to small increases in your credit score. Every time it’s late, your credit score may move in the opposite direction.
Get Current On Delinquencies
The next thing you can do is get yourself current on delinquent accounts. 30% of your credit score is dependent on credit utilization — in other words, your debt to credit ratio. Even if you have an account that’s been closed due to delinquency, paying off that debt could make a positive impact in your credit rating.
Pay Down Debt
Try to pay more than the minimum payment on active accounts also, in an attempt to increase that debt to credit ratio. The less amount of debt you have in comparison to available credit, the higher your credit score will be. Even if it’s a little more than the minimum payment you make each month, every little bit is a step in the right direction.
Don’t Close Accounts
Avoid closing revolving accounts. When you close revolving accounts you damage your credit in at least one of two possible ways. First, 15% of your credit score is determined by how old your credit is. The longer your credit history is, the better your score may be. If you close a credit card you’ve had for ten years, you’ve just wiped out ten years of credit establishing history.
Second, by closing revolving accounts, you’re closing the available credit portion of that all so important debt to credit ratio. Your ratio just got smaller, meaning movement of your credit score in the opposite direction from what you may have intended by closing the account in the first place.
Make sure that the accounts you do have that carry very minimal balances are still getting used. If you pay off a card and let it sit too long without activity, your credit card company or bank may just close the account before you’ve realized what happened.
Diversify Your Credit
Keep a healthy mix of credit lines going in your profile. Too much of a good thing is just too much, especially when we’re talking credit cards. If you’re profile is too heavily weighted by revolving credit accounts, and not much of anything else like a mortgage, auto loan, or student loan, you may actually be hurting yourself. In this case, home ownership is a very good thing, even though the mortgage itself is a big undertaking.
Exercise Caution With New Debt
Don’t take on too much new debt too quickly. A spattering of hard inquiries or acquisition of new credit lines in a short period of time will hurt your credit score. Although you may be willing to take the temporary hit to your credit, especially if the credit is very well justified, the sudden opening of three credit cards in a three month period, for instance, may be very damaging.
Knowing what your credit report says about you, and monitoring your credit score are the best ways to get started rebuilding your credit. Constant awareness of your goal and what you need to do to get there will help you focus on the necessary steps to get back on the road to good credit.
It may not happen overnight, but by paying down debt, paying on time, not accruing new debt, keeping accounts open, and monitoring your score, you may actually be surprised by how quickly your credit starts to show signs of recovery from its own personal recession.
Raising your credit score can sometimes be a long, slowly evolving process. But it doesn’t always have to be. With a little knowledge and focus you can pinpoint the areas of your credit that need the most work, and begin the process of boosting your credit.
While it may take longer for a significant transformation — like jumping from a rating of “poor” to a rating of “excellent”, pushing your score up by 200 could be a realistic goal. There are two parts crucial to succeeding at the 200 point equation: practicing fiscal responsibility with current credit and evaluating areas of weakness on your credit report.
Your Credit Report
Whether you have a good or poor credit score, knowing what’s on your credit report can greatly assist in moving your score upward. Monitoring your credit is crucial in light of the seemingly countless security breaches into major financial corporations to include Equifax in 2016, on of the three credit valuation bureaus. According to CNBC, only half of all Americans have checked their credit report since the Equifax breach, despite 147.9 million consumers being affected.
The only way to understand if and/or how your credit has changed is to know what’s on your credit report. Having a copy will help you find inconsistencies and mistakes that need to be corrected or removed from your report entirely.
Obtaining Your Report
Every consumer is entitled to one free credit report per year from each of the three credit bureaus: (Equifax, TransUnion, and Experian) according to the Federal Trade Commission (FTC). It’s easy to order online at annualcreditreport.com or by calling 1-877-322-8228. All you need is information to verify your identity such as name, date of birth, address, and social security number.
When obtaining your report, each section of your credit history should be reviewed. You’ll be able to see information on each of the following categories: summary, revolving accounts, mortgage accounts, installment accounts, other accounts, consumer statements, personal information, public records, and collections.
Check each section for accuracy. Any credit-related mistake you find and rectify should help boost your score in some degree. Even the smallest bump is movement in the right direction.
Listed Credit Lines
The most important thing to look for when reviewing your credit report is fraudulent or inaccurate credit line entries. Review each account to confirm that it’s one that’s been opened by you and that the balance reported is accurate. Review all of your closed accounts too. Depending on the length of your credit history, this may take some time and a bit of memory jogging.
One area of your report worth taking a look at is the payment history on each of your credit accounts. As payment history accounts for at least 30% of your overall credit score. Make sure all information is accurate, even on closed accounts.
Another important section of your credit report worth checking is Hard Inquiries. This section will list inquiries made by companies at your request that may impact your credit score. If there are entries in the hard inquiries section you do not recognize, you may be able to dispute it.
How To Dispute
Each credit report provided by either Equifax, TransUnion, or Experian will contain a section for disputing file information with a web address to enter and check on the status of a dispute.
Even the most dedicated financial wizards slip up now and then, or neglect an area of their credit from time to time. When working to improve your score, the areas that will give you the biggest boost – close to that 200 point mark, are debt to credit ratio (30% of your score) and payment history (35% of your score).
No matter how much or little discipline you’ve practiced in the past in this department, your credit score will be dynamically impacted by any future payment timeliness. If you ensure that 100% of your accounts are paid on time from this point on, you’ll see your credit score begin to climb.
Even a thirty day late payment will be registered into your score, so the timelier you are with all of your payments, the better. This can be tricky for those who practice the credit card rewards points chasing game, which requires juggling several rewards cards at a time. But as long as you stay organized, you can ensure solid numbers in this category.
Debt to Credit Ratio
This may be the harder part of the equation depending on your financial situation. Whether it takes you years, or you’re able to allocate money now, paying off debt will help that ratio improve — which means big jumps in your credit score.
Beware of zero balances though. If you decide to no longer use one of your cards at all, the creditor may close the account, which may shorten your credit history. The more established your credit is, chances are the better your credit score will be.
Type of Credit
Although this is a smaller category (10% of your score), every bit helps. When assessing your creditworthiness, many creditors look at the mix of your current credit profile. This is where having a mortgage, as stressful as they can be at times, is a very good thing. The more distributed your credit, the healthier you appear credit wise to potential lenders. Be careful of having too many credit cards compared to other lines of credit, especially if you’re a rewards chasing super star.
New credit lines account for 10% of your overall credit score. Be careful how much new credit you take on or inquire about obtaining. Too many credit lines opened recently will hurt your credit. Instead of opening new lines, you may want to consider contacting your current lenders and renegotiating the interest rates or terms.
Building or growing credit is neither quick nor easy. It takes time. But, it also takes diligence and mindfulness. With one eye on your credit you’ll be able to keep a handle on your spending and conduct best practices to help your credit score soar.
If you’re in the market for a home loan, you will want to take a look at your credit score first, before starting the homebuying process. Since the housing mortgage crisis of 2008, practices have become much stricter when determining who qualifies for a loan, the amount they are willing to loan, and at what percentage rate.
Your credit score has a major influence in determining what kind of home loan you can qualify for. Essentially, the higher the score the better; but there are home loan types that take other factors into consideration, such as, employment history, income, and debt to income ratio. Other lenders will offer loans to consumers with lower credit scores, assuming a large down payment accompanies the loan.
Why Credit Matters
Home loans are incredibly common. Even though almost half of the U.S. population has a fair credit ranking or lower, most of us still own homes — about 60% of households in fact. The terms of the loan varies largely based on your credit score. So the best credit score will save you thousands of dollars in interests and fees.
Home lenders look at your home loan as a product that they can sell off to other mortgage carriers. So they need to make sure their products are enticing to potential buyers. A mortgage granted to a consumer who is less than reliable with their payments makes for a far less attractive product to other mortgage carriers than a home loan granted to a consumer who has impeccable credit.
To do business with buyers with a less than stellar credit profile, different types of mortgages have become popular. These alternative loans tend to have built in guarantees backed by federal programs and often require little or no money down. Traditional loans, however, are still the most prevalent, and are granted based on a combination of credit rating, employment stability, and income.
Types of Home Loans
Traditional home loans tend to be fixed-rate 30 year loans. A fixed rate mortgage features an interest rate that remains the same for the entire lifespan of the mortgage. While adjustable rate mortgages were more popular ten years ago, since the mortgage bust, the fixed-rate mortgage has become the first loan of choice once again. Adjustable rate mortgages feature a fixed rate for a short period of time, then switch to a variable rate that climbs higher every year.
For individuals recovering from poor credit, FHA loans are available. Buyers with a minimum of a 500 credit rating can apply for an FHA loan. An FHA loan is insured by the Federal Housing Administration in an effort to keep the house purchasing market robust. To help mitigate the lower credit score, buyers usually are required to place a larger down payment or suffer a higher interest rate.
FHA loans are a great choice for first time home buyers who may not have much of a credit history established yet, resulting in a lower credit score. Buyers who are able to only put 3.5% of the sales price down, must at least have a credit score of 580. But, if a buyer can put down 10% they can qualify with a lower credit rating, between 500 and 579. Besides looking at credit, buyers need to have two years of established employment with the same employer.
VA Loans are home loans guaranteed by the U.S. Department of Veterans Affairs (VA). They are dedicated loans for U.S. military veterans, active duty military, reservists, and some other select qualifying individuals. VA loans are financed through approved lenders and allows borrowers to finance 100% of their loan with no down payment.
Credit scores don’t come into consideration with VA loans like they do with other loans, since any qualifying veteran can obtain a VA loan. The VA will guarantee up to 25% of a home loan up to $113, 275. VA loans were started in 1944 through the Servicemen’s Readjustment act, aka, the GI Bill of Rights in an effort to provide housing stability and home ownership for the welfare of veterans and their families. The VA loan is still widely popular today thanks to it’s 25% guarantee and availability to qualifying veterans.
USDA Home Loan
Another popular federally backed loan is the one offered through the U.S. Department of Agriculture to eligible rural and suburban homebuyers. The program known as the USDA Rural Development Guaranteed Housing Loan Program aims to help rural and suburban families by offering low interest rates and no down payments.
USDA loans are granted in two ways: either directly through the USDA to very low income buyers at interest rates as low as 1%, or through qualifying lenders at a low interest rate and no money down conditional upon the payment of a mortgage insurance premium.
The intention behind federally backed loans like the USDA, FHA, and VA is to keep the housing market robust and accessible to buyers of all income levels and financial background. Not everyone qualifies for these types of loans, however. So the best thing you can do to ensure you get the best loan terms, is by monitoring your credit in the expectation that you’ll be applying for a traditional loan.
Improving Your Credit
Before applying for a home loan, the first thing you need to do is look at your credit report to see where you stand. Identify your weaknesses, and create a plan for improvement. The most important areas to focus on are debt to credit ratio (30% of your score), and payment history (payment timeliness – 35% of your score).
The easiest way to raise your credit score is by paying off debt. If you’re looking to apply for a home loan, it may be worth waiting until you can pay off a good portion of debt, since a higher credit score will save you a great deal of money in interest over the life of a 30 year loan. The other way is to make sure all of your payments are made on time, every time, no matter what kind of credit line you’re paying on. Lenders update payment history regularly, so staying on top of payments is crucial.