Get Lower Mortgage Rates By Building a Credit History With Your Credit Card

If you’re planning to get a mortgage to buy a house in the future, it would be wise if you start building a good credit history as soon as possible. The reason being is that one of the basis for your future lender’s decision on whether to approve or reject your loan application is your credit score. This credit score will be based on your credit report that comes from a credit bureau. In the U.S., there are three major national credit bureaus: Equifax, Experian, and TransUnion.

What Your Credit Report Contains

Credit bureaus get the information that goes on your credit report from banks and other financial institutions. Utility companies such as electric utilities, water utilities, and telephone companies also provide data to these credit bureaus. Credit bureaus can also get their data from public records so that your credit report will show if you have filed for bankruptcy or if any lawsuit has been filed against you.

The credit report is used as a basis for calculating your credit score. The credit score is a numerical representation of your credit worthiness. One of the most known and widely used credit scores in the U.S. is the FICO Score. The FICO Score is derived from different components and 35% of the score is based on your payment history. Payment history makes up the most part of the FICO score and this is where late payment of bills will have an effect on your score.

The second biggest component of your FICO score is credit utilization and these include the ratio of your current revolving debt to your credit limit. Credit utilization makes up 30% of your FICO score. The third biggest component of your FICO score is length of credit history and this makes up 15% of your FICO score. The rest of your FICO score is derived from the types of credit in use and new credit.

Get a Better Mortgage Rate by Being Responsible With Your Credit Card

As you can see from the breakdown of your FICO score above, payment history and credit utilization make up a huge chunk of your FICO score. By getting a credit card and using it responsibly, you could build a good credit history that will reflect on your credit report.

So what are the things that you can do with your credit card to increase your score? The most obvious step is to pay your credit card bill on time. You could also improve your FICO score by keeping your balance low on credit cards. You should also open a new credit account only when necessary.

By being responsible with your credit and being diligent with paying your bills on time, you will be rewarded with a better FICO score and this will give you an edge when you finally need to apply for a mortgage. With a higher FICO score, your application has a greater chance of being approved and you could also be rewarded with a lower interest rate that will help you save money in the long term.