I'm 29 and ready to buy a house. Here's the deal. I hate the feeling associated with being in debt, so I've always operated on a cash basis (if I didn't have the money, I didn't buy it). I have one credit card with a $12,500 limit that I rarely use, and a car I paid for in cash. Now I'm worried I won't have the credit score to get a house for the price I feel I can afford along with a good interest rate. Am I going to have to wait to buy and build my credit up? – Chelsea
Ah, but when you buy the home with the help of a lender, you will most certainly go in debt. If the lender puts up the typical 80 percent of the purchase price, you'll be in the hole for many years.
But you're right that credit card debt is different, both emotionally and financially. Credit card interest rates are higher than they are for most mortgages, so constantly carrying over large consumer balances is expensive, and making payments for things you've already bought and used can be depressing.
This doesn't mean you should shy away from plastic. You've got significant borrowing power in your pocket, and as long as you follow some simple rules, you can use it to your advantage. Since you want to appeal to a bank for a good home loan, charging wisely is what you ought to do.
The way you use your credit card can make or break a credit score. Everything you do with the account is recorded on your consumer credit reports. Credit scores, such as FICO, take the financial information from those reports and input it into their mathematical model. A number is produced (from 300 to 850) that is designed to help lenders and other businesses quickly assess risk. The higher your score, the safer you are likely to be as a customer, since the past is a predictor of the future. If you have a great score — the mid-700s and above — you will likely be offered the best interest rates and terms.
Because you'll be shopping for a mortgage, you'll want to take immediate action to hike your score as fast as possible. Find out what yours are now from myFICO.com (about $20 per report from each of the big three credit bureaus). Try not to be upset if they're low. With so little activity on your reports, that's to be expected.
Take that card out of your wallet and charge a single expense per month. Make sure it's one you can and will delete in full by the due date on your statement. For example, if you know you spend $200 at the grocery store every two weeks and have been paying with your debit card, switch over to credit. Just keep your cash in the bank until the card payment is due. Your average balance and payment pattern will be noted on your reports, then scored.
As long as you send what you are supposed to on time and keep the debt to zero (below 30 percent of your available limit is fine for scoring purposes, but owing nothing is best for you, as you won't have to waste any precious money on financing fees), your FICO scores will escalate. Check them again in six months. You'll see that they're headed in the right direction, which should motivate you to stay the course — and not fear your credit card. It's a tool that you can use to build a financial history, not destroy it.
If you can wait until a full year has lapsed, all the while borrowing and repaying perfectly, your scores will probably meet a bank's high standards. Of course, the lender will assess your entire situation, including income and assets, but at the very least you'll have proven what they most want to know: that you're responsible.
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