If you want to buy a house, having a solid, positive credit history and high credit score paves your way toward the best loan terms. It takes time to build a good credit history, so the sooner you start making it a priority, the better.
Many hopeful first-time homebuyers don’t know where to start when they’re trying to build up their credit. Opening a credit card may seem like the fastest and easiest way to create a good credit history. However, using credit cards can be a slippery slope that can land you into debt if you don’t manage them wisely. Here’s how to use your credit cards to build credit AND stay out of debt.
Become an Authorized User
If you have a spouse or close family member with excellent credit, ask them if they would add you to one or two of their credit cards as an authorized user.
Authorized users aren’t on the hook for any of the credit card’s balance, but they do benefit from the cardholder’s positive credit history. This approach is one of the fastest ways to build good credit.
Remember to only become an authorized user if the main account holder has excellent credit. There shouldn’t be any late payments on the credit card you’re added to, the card should be at least seven years old, and the balance should be 10% or less of the card’s limit.
Open One Credit Card
Credit scores look at how many accounts a person has opened in a short window of time. If you open multiple accounts close together, it looks like you’re taking on too much credit, which makes you seem risky and can keep your credit score low.
Open only one credit card within a six-month period to build credit without looking like you’re getting in over your head.
Use the Credit Card
Simply having a credit card doesn’t do you any good. You need to show you can manage debt obligations wisely. Charge a tank of gas every month or a dinner out here and there. However, don’t go overboard with your spending just because you have a credit card. It’s tempting to whip out the plastic to pay for things you want, and you need to avoid doing that. Don’t make any impulsive purchases on the credit card that you’ll regret later.
Always Pay on Time. Always.
The biggest factor in building credit is paying on time. Make sure that you get that credit card payment in before the due date every month. Consider adding a reminder on your calendar or setting up the payment through your bank account in advance. Just one late payment can thwart your credit building plans for months and be an obstacle to getting a home loan.
Pay Your Monthly Balance in Full
Even if you pay the credit card off every month, the activity still helps you build positive credit history. Plus, it keeps you from getting into unwanted debt. As you’re using your credit card, make a point to not charge more on it than you can pay off before the due date. This practice keeps your plans on track and prevents you from over-charging.
Carry a Low Balance (if you can’t pay off your balance)
While it’s better to not ever carry a credit card balance, emergencies happen. Maybe your car broke down, or you had another type of unexpected expense that you used your card to cover. If you’re in a situation where you are carrying a credit card balance, keep it as low as possible.
Credit scores factor in what’s called a credit utilization ratio, which compares the balance to the credit limit. If the balance is anywhere close to the credit limit, it will usually decrease your credit score. Since you’re trying to build your credit, you always want to avoid a high balance.
Credit cards are helpful vehicles if you’re trying to build your credit history to buy a house. However, they can tempt you into making frivolous, unnecessary purchases that can get you into financial trouble. By thinking about your credit card charges before you make them, and paying off your balance on time every month, you can take advantage of the card’s benefits and avoid its drawbacks. With consistent discipline, good credit management will get you approved for a mortgage and into the home you want.