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To Her Credit

Building a mortgage-worthy credit profile

Women often face challenges landing a home loan, but building your credit score can help you get there

To Her Credit offers targeted advice about personal finance based on unique challenges faced by women. It is authored by women with different financial backgrounds, dedicated to encouraging empowerment through financial literacy.

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Research shows women often face challenges getting approved for home loans, and financial gender inequality may be to blame.

A study conducted by the Woodstock Institute found some concerning results around the gender gap when it comes to mortgage applications and approvals. In 2017, men made up more than 67 percent of mortgage applications, yet women were more likely to be denied. These figures have stayed mostly static over the last 10 years, too. In 2009, almost the exact same dominating percentage of applications were submitted by men while women were still more likely to be denied.

It might be easy to attribute these findings to gender bias during the application screening process, but the more likely answer runs much deeper. Typical reasons for mortgage denial include a high debt-to-limit ratio or a poor overall credit history, which are more prevalent among women. Because of traditional gender roles in society, the gender pay gap, the gender wealth gap and overall gender inequality issues, women are still at a disadvantage to men when trying to establish financial independence and establish a strong credit profile.

While the large-scale fight for gender equality is long and collaborative, there is something every woman can do to fight back: maintain a high credit score.

A strong credit score is important for financial equality

Your credit score is a tool lenders use to determine your trustworthiness when borrowing money and answer questions about your financial habits.  Will you max out your credit line? Will you pay your bills on time? Will you pay off your debt in full? Are you a high-risk or low-risk borrower?

Anytime you try to borrow money – whether on a credit card, small business loan, car loan or mortgage – your credit report and overall score will be reviewed to determine if you’re approved or denied and what your interest rate and credit limit will be.

A high credit score can also protect you (and your kids, if you have any) in case of divorce, a spouse’s death or events that cause your spouse’s credit score to drop.

Gender roles in society have an effect on women and credit

Women sometimes have thin credit files due to traditional gender roles. An example is a household in which the husband is the family’s financial manager and applies for all credit cards and loans in his own name. In this case, his wife will not have an opportunity to build credit unless she obtains other credit lines in her name. If the husband dies or the couple divorces, the woman may find it difficult to strike out on her own.

A relatively low income – perhaps due to gender bias in the workplace – can also hamper a woman’s ability to build credit.

One of the most important factors lenders use to calculate your credit score is credit utilization. Credit utilization indicates how much of your total available credit you’re using. For example, if you have a card with a $2,000 limit and your balance is $1,000, you have a credit utilization ratio of 50 percent. The lower your average utilization across accounts, the better your credit score will be.

Credit limits are often based in part on your monthly or annual income. It stands to reason that because women typically make less than men (thanks, gender pay gap), that can result in a low credit limit, and a better chance of credit score damage from high utilization.

Establishing your own credit

If you have a thin credit file, there are a few ways to build it up:

  • Become an authorized user. If you don’t have any existing credit history to work with, you can start by becoming an additional cardholder or authorized user on a friend, family member or spouse’s card.
  • Apply for a secured or prepaid card. These cards are great starter cards for those who are worried about credit card debt, and they generally require no credit history to get approved. Just make sure the card you choose reports to one of the major credit reporting agencies.
  • Apply for a rewards credit card. If you qualify, cards with no annual fee and a low APR can help you build credit with small purchases that you pay off each month. Plus, rewards cards help you earn points and miles that you can use towards travel or your monthly statement.

Preparing your credit before buying a home

Establishing credit isn’t enough to get a solid mortgage approval; your score must be strong, and your credit habits need to be healthy.

Here are a few ways you can make sure your credit profile is in great shape before you apply for a mortgage:

1.  Check your credit reports

A high credit score and a clean credit report can help you lock in a low interest rate. You can visit AnnualCreditReport.com to pull a copy of your report and look over it. You’re entitled to a free copy once a year from the three major credit bureaus – Experian, Equifax and TransUnion.

Review your reports for errors, no matter how small. Correcting these can help bump your score and ensure you have an accurate profile. All three bureaus handle report disputes online, which helps simplify the process.

2. Stay away from larger purchases and unnecessary credit lines

As you get closer to when you plan on applying for a home loan, avoid making large purchases and opening additional lines of credit. Experts advise limiting the number of hard inquiries into your account and keeping your credit profile “quiet” leading up to the homebuying process.

3. Reduce your utilization

Paying off debt (without draining your savings) can help boost your credit score, helping you land a better interest rate on your home loan.

Keeping your utilization low across your accounts is always a good credit habit to get into, whether you’re planning on buying a home or just want to stay financially healthy.

4. Improve your areas of credit weakness

Do you have a habit of forgetting to make payments on time? Set reminders on your phone or enroll in auto pay. Are you behind on any payments? Talk to your lender or card issuer about getting back on track. Did you find multiple errors on your credit reports? Make every effort to get those corrected.

Take the time you need to get your finances as healthy as possible before applying for that loan application. An extra six months to get your credit score up could mean the difference between being approved with a great interest rate and barely scraping by with a rate that will cost you an exorbitant amount of money down the line.

Protecting your credit

Your credit isn’t only important in the lead-up to buying a home. Credit scores are commonly used as an indicator for your overall financial health. Establishing strong credit habits and protecting your score can help you remain financially independent throughout your entire life.

Monitor your credit score for fluctuations and suspicious activity. Most card issuers have mobile apps, and many have built-in credit monitoring benefits for all cardholders. A lot of card issuers and banks also allow you to set up purchase notifications, which can also help you stay on top of spending while watching out for fraudulent charges.

Another way you can protect your credit is by protecting your personal information. Never give out private information like usernames, passwords or account numbers over the phone or through email.

Finally, avoid using your credit cards more than is necessary. Pay them in full each month to avoid incurring interest charges and keep your credit score in good shape.  And maintain a savings account for emergencies and large purchases.

The bottom line

Building and maintaining a strong credit profile is important – both for future loan applications and overall financial gender equality. Make sure you’re putting your best foot forward for your future by establishing healthy credit habits, whether you’re a newly single mom looking to gain financial independence or a college graduate ready to make your mark on the world.

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