When Your Mortgage Meets Your Credit Card History
For some homebuyers, credit card history is a golden brick road to a low-rate mortgage. For others, a credit card history is a minefield that threatens the survival of any sort of mortgage. And for others still, credit card history is a path yet to be blazed, destination uncertain.
If you fall into the second or third category, you might be feeling apprehensive about applying for a mortgage. Understanding the relationship between credit card history and mortgages can help you make the right moves to get a low-rate mortgage, despite your credit card history.
What happens if you have a negative credit card balance?
If you have outstanding credit card debt at the time that you apply for a mortgage, you will need to prove that you have the assets to pay off the debt. Otherwise, you can expect to be dealt a high interest rate on your mortgage.
If you have had outstanding credit card debt for most of your adult life, you might face an even stiffer penalty. You might not be able to get a mortgage at all.
Your credit score, used by loan officers as a determinant of your mortgage rate, reflects your entire credit history. If you usually pay off credit card debt in a timely manner, your credit score should be okay, even if you have some debt at the moment. However, if you have defaulted on one or more credit cards in the past, your credit score will show damage.
How should you deal with negative credit card balances?
If you don’t need a mortgage immediately, you can save yourself money by waiting until you’ve paid off your debt to get a mortgage.
Start by consolidating your debt. Shift balances from multiple, high-interest credit cards to one low-interest card. Each high-interest credit card will charge you a transfer fee (usually around 3% to 5% of the balance) when you move your balance to a new card, but because the interest rate is lower on the new card, you’ll have an easier time paying off debt.
After you’ve consolidated your debt, create a budget to control your spending. Purchase only needs, not wants. Before long, you should begin to discover that you have a little money leftover at the end of each month. Use that money to pay down your debt and, whenever possible, pay more than your minimum payment.
What happens if you have never had a credit card?
Lack of credit does not equal financial irresponsibility. Lenders know this. That’s why a number of options have been designed to assist people without a credit history in getting a mortgage.
Government-backed mortgages (FHA loans) are designed for low-income, first-time homebuyers. Instead of being based on a credit report, your mortgage will be based on evidence that you have been reliable in paying rent, utilities, or other recurrent bills. The paperwork involved with FHA loans is dense, and you may have to put down a larger than usual down payment.
Alternatively, you could ask a friend or family member with good credit to co-sign on your loan. Before you choose to have someone co-sign for you, make sure you both have a thorough understanding of the effect the loan will have on your credit reports.
How should you establish new credit?
If neither FHA loans nor co-signers suit your fancy, you will need to spend some time establishing good credit on your own.
Get a credit card and use it the same way you have been using your debit card. Pay only for things you can afford, and keep track of the balance as you make purchases to be sure you aren’t overspending. Pay off your credit card balance each month, and you’ve got yourself some good credit!
