How to build up a thin credit profile for a future mortgage

With just one loan on file, adding a credit card will beef up credit scores

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I’m 27 years old and never had a credit card, just a car payment co-signed by my stepdad. I am trying to buy a house this summer, so I need to get a credit card but I want something with little or no interest. Which credit card should I get? – Kristi

Answer

Dear Kristi,
A secured or very low limit credit card will probably be best for you.

Here’s why:

To qualify for an unsecured account with a large limit, you need to have proven that you have already charged responsibly with multiple cards. Then, when a credit issuer checks your credit reports, it would see that you’ve managed any cards you had without missing payments or carrying over an abundance of debt.

Since the past is a predictor of the future, that history (plus a steady income source), will result in a high chance of new credit approval.

Credit scoring companies such as FICO and VantageScore take the information that appears on a credit report and plug it into mathematical models. Payment pattern and credit utilization (the amount of debt you have compared to the amount you can charge) is weighted heavily, as is the recency of your credit activity.

For example, a late payment made last month would be more damaging than one made four years ago. What emerges is your credit score: a number of between 300 and 850 that lenders can use to quickly gauge whether you qualify for any kind of credit product.

Because you don’t have much on your credit report, other than a car loan, there isn’t much with which to calculate a credit score. The vehicle financing should be listed on your credit reports, which is good if you or your father have been sending all payments in on time.

Your credit scores won’t be high, though, if the car loan is new and that’s the only thing listed on your credit report. Credit scores also consider length of credit history, and longer is better. So are the types of credit you’ve had and a variety of credit products (loans, credit cards, etc.) is favorable.

However, everyone must start somewhere, and the sooner you bulk up your credit usage, the faster you’ll develop credit scores that mortgage lenders will find attractive.

Which brings me to your options. There are plenty of credit cards designed for people who haven’t yet created robust credit profiles.

Secured credit cards (see video) are a smart place to start. To obtain one, you put down a predetermined sum (which can be as little as a few hundred dollars). The credit issuer will then give you a credit line equal to or sometimes more than the deposit. If you charge regularly and pay on time and in full, that should show up on your credit reports. In six months to a year, you’ll have enough information on your credit reports for a decent credit score to be developed.

As for your question about getting a card with low or no interest, they are out there, but with your relatively young credit profile, you probably won’t qualify for one. The good news is that you never have to pay interest as long as you pay the balance on the card every month. This is called a “grace period.” The only time interest is applied is when you pay only part of what you owe and roll over a balance to the next month. 

 

Video: What is a secured card?

After a year of using the secured card responsibly, you may want to apply for another credit card and use it just as perfectly as the first, since multiple accounts in use will cause your scores to rise swiftly. Check your credit scores before you apply for a card to make sure you are picking one that is a good match to your credit profile. And never apply for multiple cards at once: Each application will ding your score when the lender does a hard pull of your credit profile to see if you qualify for the card.

If you’d rather not start with a secured card, consider low limit credit cards, such as a retail card. Just be sure to bring the balance to zero every billing period, as even a small revolving debt on a low limit card can upend your utilization ratio. Plus, retail cards tend to have high interest rates.

Bear in mind, too, that mortgage lenders will analyze your entire financial picture. The amount of your down payment, annual income, net worth and job security are all critical. You may not have enough time to create an impressive credit score by summer, but if you earn a lot in a strong industry, offer an extra large down payment and own far more than you owe, it’s possible to make up for a thin credit file and low credit score.

See related: Adding second card may boost thin credit file, FICO’s 5 factors: The components of a credit score

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Updated: 11-18-2017