3 Ways Credit Cards Could Help or Hurt You When Buying a Home

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Judicious use of the cards is essential if you hope to become an owner.

Key points

  • Credit cards can impact your finances in several ways.
  • Sometimes they can even help you buy a house.
  • In other cases, they could negatively impact mortgage approval.

When it comes to buying a home, you might think your credit cards have little to do with the process. After all, you usually can’t charge a down payment or closing costs, or put mortgage payments on a credit card — at least not without using a third-party service that charges a lot of fees.

The reality, however, is that your cards could help — or hinder — your efforts to get mortgage approval. Here’s what you need to know about the impact your use of credit cards could have on your home buying efforts.

1. Credit cards can help you build credit to make it easier to get your mortgage approved

Credit cards can be one of the best tools for building a strong credit history and getting a good credit rating. Many people can get approved for a certain type of card, even if it is a secured credit card. This is a type of card designed for people trying to build credit and requires a refundable security deposit.

Once you have a credit card, you can use it responsibly and your borrowing behavior will be noted by credit reporting agencies. As you establish a history of on-time payments and show that you can keep your credit utilization rate low, you will develop a great credit record. Your responsible borrowing behavior and high credit score can open the door to easier mortgage approval, as lenders will view you as a responsible borrower.

2. Cards can also lower your credit score, making it harder to get a home loan

Unfortunately, while responsible credit card use can boost your credit score, irresponsible use can hurt your credit report and make buying a home more difficult.

If you pay your cards late or use more than 30% of your available credit, you could end up with a low credit score. This could mean you’re only limited to subprime lenders or government-backed loans, which may be easier to qualify and offer affordable interest rates, but often come with higher upfront fees than conventional mortgages.

3. Overcharging on credit cards could also interfere with your ability to get a mortgage

There’s another problem you might face with credit cards that affects your efforts to buy a home: asking too much from them could negatively impact not only your credit score, but also your debt-to-equity ratio. .

Mortgage lenders look at your debt relative to your income to assess whether you’re likely to be able to comfortably afford to pay off your home loan. If your debt repayment exceeds a certain percentage of your income, usually around 36% with most lenders, you may not be offered a home loan or you may be asked to pay a much higher rate. raised.

The last thing you want is for your credit card to be used to prevent you from becoming a homeowner. Make sure you know exactly how your card could help or hinder your efforts to buy your own home. You should be aware of this as soon as you obtain your card, but especially during the years preceding the purchase of your property.

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