When applying for a mortgage, lenders will review a borrower’s employment, income, down payment, and credit history. Even if the borrower’s credit scores are acceptable, many lenders will look at the length and amount of credit established. If the borrower does not have an established payment history, the loan may be denied due to poor or insufficient credit. The following sources may be used to establish your credit history and generate acceptable scores for obtaining a mortgage.
• Secure Credit Cards: This type of card is offered by large banks (available online), local banks, and credit unions. A secure card usually requires a deposit of $300 to $500 to open an account. Secure card administrators will report payment activity to credit bureaus just like a standard credit card. This is a great way to get new credit. The last thing you want to do is apply to numerous lending institutions and rack up inquiries (which will lower your scores). You may need a co-signer if your credit score is below 500. After six months of on-time payments with a secure card, ask the lender to upgrade your secured card to a standard card. When the card is upgraded to a standard card, request that the credit limit be increased. This will give you more room to keep your balance below thirty percent of the available limit, thereby maximizing your potential scores.
• Department Store Cards: These are a good place to establish credit, because they are usually easier to qualify for. Pay your balance in full and on time each month, and then try to apply for a regular bank credit card in six to twelve months.
• Authorized user cards and loans: If you can’t open a secure card, try becoming an authorized user with a family member. They can qualify for the loan or credit card and add their name as an authorized user. You can use the card, make the payments, and have the payments posted to your credit report. Just remember, payment activity will also be reported on your family member’s credit report.
Once you’ve established credit, it’s important that balances on revolving cards stay below 30% of the cards’ available limit. This will help maximize credit scores. Make sure all payments are paid on time. It is important to limit your inquiries for new loans or cards. When shopping for a new credit card, installment payment, or car loan, research the requirements first. If you don’t qualify for the loan, go to another lending institution. The last thing you want to do is lose points for pulling credit (inquiries). A large portion of your scores are calculated from your revolving credit usage, so while you’re establishing new credit, it’s important that you don’t close any existing cards. Doing so will reduce your available credit in the long run and likely lower your credit scores. In general, the credit bureaus will not differentiate between a credit card closed by the consumer or by the creditor.
One option available to track your scores would be to pay for a monitoring service to track your credit score progress. Your scores are not affected when you pull your credit report; they are only affected by the lenders who pull your credit who can offer or extend credit to you. It can take 12 months to establish an acceptable credit history to obtain a mortgage.
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