Credit Cards

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

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Smart card use is key if you hope to become a homeowner.

Key points

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

When it comes to buying a home, you may not think that your credit cards have much to do with the process. After all, you typically can’t collect a home down payment or closing costs, nor can you charge mortgage payments to 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 hurt — your efforts to get approved for a mortgage. Here’s what you need to know about how credit card use could affect your efforts to buy a home.

1. Credit cards can help you build credit to make mortgage approval easier

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

Once you have a credit card, you can use it responsibly, and the credit reporting agencies will take note of your lending behavior. As you build a history of paying on time and demonstrate that you can keep your credit utilization ratio low, you will develop an excellent credit history. Your responsible lending behavior and high credit score can open the door to easier mortgage approval, as lenders will see you as a responsible borrower.

2. The cards could 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 damage your credit history and make it harder to buy a home.

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 limited to only subprime lenders or government-backed loans, which may be easier to qualify for and offer affordable interest rates, but often come with higher up-front fees than conventional mortgages.

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

There’s another problem you may face with credit cards that affects your efforts to buy a home: charging them too much could negatively affect not only your credit score but also your debt-to-income ratio.

Mortgage lenders look at your debt relative to your income to assess whether you are likely to be able to comfortably repay your mortgage loan. If your debt payments exceed a certain percentage of your income, usually around 36% with most lenders, they may not offer you a home loan or ask you to pay a much higher rate.

The last thing you want is for your credit card usage to prevent you from becoming a homeowner. Make sure you know exactly how your card could help or hurt your efforts to purchase a place of your own. You should be aware of this from the moment you first get your card, but especially in the years leading up to the purchase of your property.

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