Credit Cards and Buying a House

We get questions all the time from folks who want to know if they can still buy a house if they have credit card debt.  Honestly, having NO credit card debt will bring your credit scores down!  We explained credit cards and buying a house with an Intern here, and asked her to write what she’d learned.  So this post is actually from our 23-year-old Intern, Mary Hartsock.

Credit Cards and Buying a House

If you’re like me, you are probably just starting out in the professional world. Maybe you are in grad school, still working part-time, or interning. Either way, your early twenties are the years where you build the blocks for your future. As daunting as that sounds, it’s also pretty inspiring.

We can build the life we want right now… We can have the “American Dream!”

One way to do that is to establish good credit. I know, that sounds like I sell credit cards, doesn’t it? The truth is that your credit will be checked for renting an apartment, getting car insurance, and applying for a job, in addition to the obvious loans we associate credit checks with. Student loans and a car payment are great, but your credit score will still be incomplete without a few forms of revolving credit.

With this article I will show you how to get the maximum benefit out of a credit card to set yourself up for smooth sailing in the future.

Revolving credit comes only in the form of a credit card. We call it revolving because you are using your card frequently, and incurring interest all the time (I promise it’s not as bad as it sounds!). This shows the credit bureaus– and anyone else who will ever run your credit– that you are capable of having someone give you thousands of dollars and not blowing it on the first pair of boots you see.

It’s vital to something like a home loan. Credit cards and buying a house, actually go hand in hand.  

I have seen people with high credit scores, who paid their student loans and car payment like clockwork, still get rejected from certain loan programs because they lacked revolving credit. They probably thought they were all set with the debt they had, but ended up missing out on a great rate because of it– and trust me, the rate on your mortgage lasts for the entire life of the mortgage. That’s longer than most canned food.

Convinced yet? Now let’s dig into the credit cards that are actually worth it and how to get them.

You might be better off to walk away from the Victoria’s Secret card (and the airline card). I told you, it’s a science. A store card has all of the same benefit when it comes to giving you revolving credit.

The bummer here is that more often than not, they do not report to all three bureaus: Experian, TransUnion, and Equifax.

You will get the most benefit from a major card– and that’s what this article is about: getting the most out of your time and money. The good news is that you have more than enough options. Most people begin with a “starter” card and a low limit. You don’t have any credit yet so expect a pretty hefty fee just to get the card.

This first card will carry you to brighter horizons soon if you use it correctly. Major cards include Capital One, Credit One, Chase, Discover, American Express, Barclay’s, or your current bank’s. I have First Tennessee and Wells Fargo, and that’s just fine.

Follow these tips with your first card to make sure you get the most out of your time and money, remember credit cards and buying a house go hand and hand:

• Leave a $10 balance on it at all times. Or something equal or lesser to 25% of your total credit limit. If you fill up your tank for $40, pay $30 and the interest. You want to always leave a low amount of “usage” on your card in order to get the maximum benefit out of every single month.
• Pay off the fee! Let’s say you are charged $125 to open your credit card. Pay that off as soon as possible. If your limit is only $300, you are almost to 50% of your max limit. Not good.
• Use your credit card for something you are already going to buy. Sadly, this is not the credit card you hear about when people have a bad day and splurge at the mall. This is not the credit card you use to buy Christmas gifts or make sure you get the new iPhone. If you do that, you will have “OK” credit for however long it takes you to pay off your maxed out balance + interest. Yikes! Stick to gas, groceries, and the water or electric bill.
• Set an alarm! I personally pay my credit card bill every time I get paid. This ensures I give it the priority it deserves, and also that I don’t simply forget. Set an alarm on your phone or leave a sticky note on your mirror. Pay that card! Late fees, as we’ll discover in the next paragraph, are not something to mess with.

*Some banks are picky; make sure you pay attention to the fine print and pay your bill a few days early or at the very least, before 5pm on the day it’s due, according to the bank’s home time zone.

Which credit card do I choose?

I would recommend choosing from one of two types: the major credit card I talked about earlier, or a secured credit card. A secured credit card is the safest option. This card carries all of the weight of a standard credit card and still reports to all credit bureaus. The safety comes from the way it is set up.

To simplify, here is how a secured card works: You go to a bank and open a savings account. You ask for a secured credit card and if ever you miss a payment, it comes out of the savings account. This saves you from having a late payment.

Late payments are the fastest, easiest way to ruin all of your hard work and trap you in extra fees. They also hurt your credit, and we’re trying to boost it because you are using your credit cards and buying a house! You will not only have to pay your monthly payment eventually, you will also have to pay a late fee on top of the interest, AND take a hit on your credit score.

If you are worried you might experience months of being strapped or gaps in employment, the secured card is for you. Typically, you get a 30-day grace period before the bank reports to the credit bureaus that you are late. It is wise to not make this a trend though. Set a reminder!

What are the cons of a credit card?

Like any big decision, a credit card is to be taken seriously. Late payments will negatively affect your score, and you cannot recover your former good standing by just “paying it off.” Once you decide to enter the world of credit, every move is documented. There are many creative ways to remind yourself to pay it on time, and every single bank or credit card company should offer an auto-pay option if you find you keep forgetting your payment date.

Onward, soldier.

Now that you know how to choose the best card for your lifestyle, take advantage of the opportunity! Follow the steps we have provided and maximize every benefit. Pretty soon, you will be able to get another credit card and you’ll be on your way to excellent credit.

If you have two instances of revolving credit (two credit cards) you could be eligible for a mortgage in as little as 6-9 months, depending on where you started and other debt and liabilities you carry.

That’s pretty amazing that we could be homeowners that quickly! The goal here is that one day you are able to balance two, maybe three credit cards, and THEN you will be able to charge those VIP concert tickets to them 🙂

In some parts of North Carolina there’s this “Urban Myth” that if you just “Dispute” all of the bad stuff on your credit report, you will get higher scores.  If you’ve been drinking this Koolaid… we suggest re-thinking that idea.

If you are a First Time Home Buyer – there’s more than just a Rate that you need to ask questions about, what about those First Time Home Buyer Programs that you could be missing?!  Have more questions about building your credit with credit cards and buying a house??  We want to help you!  Call Steve and Eleanor Thorne at 919-649-5058 and get pre-qualified right now!