Caution: Opening A Credit Card Before Buying House Can Cause Problems
Is opening a credit card before buying house a wise decision? Buying a house is an exciting time in life, but getting a credit card can be an exciting time too. Which should come first?
The answer is easy – while you need to have credit cards long before you buy a house to help you build good credit and get a great deal on your mortgage, when the time to buy a house draws near you want to avoid applying for any credit cards before you sign on the mortgage dotted line. Open the credit card after buying a house.
Opening a Credit Card before Buying House: Applying for Cards Lowers Your Score
When you apply for a credit card you lower your FICO score by 3-5 points. This might not seem like much, but the truth is that mortgage interest rate calculations can be very picky. Sometimes just a couple of points can mean a pretty big difference in your interest rate.
In fact, let’s say you are buying a house with a $150,000 mortgage. At an interest rate of 5% your principal and interest payment would be about $805 a month with just under $140,000 interest paid over the life of a 30 year loan. But at 6% interest – just a 1% interest increase – your payment would be nearly $900 a month, with nearly $174,000 in interest paid out over 30 years – that means the house will have cost you almost $34,000 more!
Right before you get a mortgage is not the time to buy a car, get a new credit card or do anything else that could possibly hurt your credit score by so much as a point. This is the time to pay your bills on time, pay off as much debt as you can, and put yourself in the best possible position to get a good mortgage interest rate.
Oh, and a little note you may not know – the FICO score people know that smart consumers shop for the best interest rate on a mortgage. So you can feel free to apply for a few mortgages from different companies within a six month period and these will not negatively impact your credit.
After Your Mortgage Credit Offers will Fly In
The great news is that banks seem to come out of the woodwork wanting to send credit card offers after buying a home. So opening a credit card before buying house is a bad idea, partly because you get better offers after. Creditors figure that if you passed the mortgage people’s tests then you are probably good enough for them. So this is a great time to sit back and watch the credit offers pile up in your mailbox. Just don’t apply for any of them until your mortgage is all signed for and closed.
In fact, after you pay on your mortgage for a couple of months there is a great chance that your credit score will have gone up. This can open even more doors to great credit card deals.
Mix it Up
Remember that part of your credit score involves having a mix of different types of accounts. So having a credit card or two, a mortgage and a car payment can all help to build your credit score, leading to even more favorable terms on new accounts in the future. But be careful using a credit card while buying house; you don’t want to increase your balances until after the mortgage is closed.
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