Credit Use for Mortgages
Credit is one of those tricky things where you need to have something that’s constantly painted as bad (debt) to create a credit history to be analyzed for this larger debt that you want to get. Bless Dave Ramsey, but if you want to buy a house and still, I don’t know, live a life, you can’t pay everything with cash only because then you won’t have anything that reports to the bureaus for mortgage lenders to analyze to determine if you are a responsible bill payer.
So, here comes the spiel about responsibly utilizing credit:
Get a credit card, use it for ONE thing and pay it off every month.
For example: I have a Capital One card with a $750 limit that I use for gas only. I chose gas because it’s something that I’m paying for anyway, whether it’s on a credit card or with my debit card, and it’s a fairly consistent amount per month, so I just delay paying it specifically so I can have something report on credit aside from a car loan or student loans.
Using groceries as this one thing can be dangerous as there are times when you need things out of your weekly shopping excursion, like toiletries, that can add up and it can be easy to let that expense get out of control.
Maybe put all of your subscriptions on the card – Netflix, Hulu, the music service of your choice, etc. because, again, these are a consistent amount monthly and something you’re going to pay anyway, so just let it go on the card and pay the card in full every month.
That’s the important part.
I recommend that you have an auto-pay set up so the full statement balance comes out on the same day (after the statement date) every month.
You need to let the statement come out with a balance on it so the account can report accurately on credit.
If you consistently keep a -0- balance on the card (as in, paying the charge as soon as it goes on your account) then a -0- balance is consistently reported to the credit bureaus which implies that you don’t use the card and your usage will not be included in the algorithm that calculates your credit score.
Another idea for credit utilization is a credit builder account – something like this Self (this is an affiliate link) account where you are paying a certain amount per month to a CD/savings account, whose balance you get deposited into your bank account after a certain period of time.
Many credit unions offer this type of product as well. The important thing to ask is if they report to the credit agencies, and how often they report, as that’s the whole point of this exercise, right? With this option, you’re playing the credit game without having to spend on consumption, rather you’re “spending” on savings.
Paying Down Debt on The Road To Home Ownership
If you fall on the other end of the credit spectrum – you have a lot of debt over various types of accounts – credit use isn’t something you’ll need to worry about, but paying down debt is your chore. I am not a financial planner, but I’m certain that you have been bombarded by everyone else’s solutions for paying down debt effectively, so I’ll let you figure out what strategies work best for you and your lifestyle.
The only idea I’ll plant here is to figure in petty cash/spending money for yourself with whatever strategy you implement. Forgetting about that or strictly limiting yourself in that vein is a big factor in being able to stick with any debt payoff plan.