How a credit card helps boost scores for future mortgage
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Dear Opening Credits,
I'm looking into buying a house in the next year or so. I have good credit, a little school debt and a car loan, but no credit card. As I prepare to shop for a mortgage in the next year or so, should I consider opening a credit card? – Jamie
Because you have some positive data on your credit reports, you seem to be on the right credit history track for a great home loan. Now it’s time to speed this train along with a well-managed credit card! With about a year to go before you launch into the home-buying process, you can make a tremendous amount of progress with just a single piece of plastic.
It’s always a good idea to understand your target market, so to gain the perspective of someone in the business of approving home loans, I reached out to Courtney Vieira, a mortgage loan officer from Enterprise, Alabama. I asked what she would think of your credit history as it stands today.
“On paper you’re not in a bad position,” says Vieira, “but check your credit scores to make sure.” All the financial data that is listed on a consumer credit report will be factored into these scores, such as the VantageScore and FICO. Both scoring systems start at 300 and go up to 850. Higher scores are an indicator of less lending risk. In general, below 599 is considered bad, 600 to 649 is poor; 650 to 699 is fair; 700 to 749 is good; and scores above that are excellent.
According to Vieira, mortgage lenders will expect credit scores to be at least 680, although higher scores will result in more preferable terms.
In addition to the actual score, though, mortgage lenders will also dive into the specific information on your credit report. They’ll check out the number and variety of credit products listed.
“At a minimum, we want to see at least three trade lines that you're paying on time,” says Vieira. She points out that you appear to have only two accounts on your credit reports. The first is that vehicle loan and the second is what you borrowed for your education.
So does that mean you’re short one trade line? Not necessarily. It’s entirely possible that you have multiple student loans, but you’re referring to them as a single debt. In that case, you have met the number of active accounts criteria. Pull your credit report from AnnualCreditReport.com to find out. It will also give you the opportunity to correct any errors that you may see.
Even if you have enough trade lines, it’s best to mix things up with a different type of account. “I definitely recommend getting a credit card,” says Vieira. “It doesn’t matter what kind, just get one and use it right.”
I agree. However, take pains to apply for the right card for you so you don’t have excess applications on your credit report. Multiple hard inquiries can lower a credit score.
Using your current credit score as a guide, focus on the cards that are in your credit score range. You can get a free VantageScore from CreditCards.com. Mind that you’ll also need an income, since the issuer will want to be sure you can afford to repay any debt you accumulate with the card. This is especially important for a mortgage, so secure your job. This is not the time to job hop.
Once you have a credit card, charge small items with it regularly, pay the entire bill to avoid a running balance, and always send payments before the due date. In 12 months your credit rating should improve markedly.
As for the car and student loans you’re carrying today, concentrate on reducing their balances as much as possible. The less you owe when you apply for a mortgage, the more you can borrow for the home of your dreams.
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