Do you need a credit card…or two?

Debt often gets us into trouble when we spend money we do not have.  Instead of saving, we charge purchases on our credit cards or take out small loans.  It is easy to lose control by charging our credit cards to their limit or taking out loan after loan.  However, open and active credit lines in good standing build our credit and show our worthiness as a borrower.

What is the difference between loans and credit cards? 

Small loans help build credit, but once they are paid and closed, they are no longer an open, active line.  Credit cards, on the other hand, will stay open and active for as long as you use them.  What’s more, keeping your credit cards open and using them a little each month will help build your credit.  Pay your cards each month, on time, and do pay more than the minimum payment.  It’s good to pay off your card, but leave a small balance of $5.  Leaving a small balance on your card each month is helpful because it shows that there is activity on the card.

Are there different types of credit cards? 

Yes, there are, and the type of credit card you get is important.  Many major retailers will offer you a discount on your purchase if you take out a credit card with them.  The discount may sound very tempting, but stop and think before they run your credit.  What is the interest rate for this charge card?  Are there any annual fees?  Retail charge cards often have very high interest rates.  Also keep in mind that retail charge cards may not positively impact your score like a bank credit card will.  Our credit scores are often influenced by whether we have a bank credit card or not.  Additionally, bank credit cards are generally accepted in many different places for purchases.  Retail credit cards are typically only accepted by a specific retailer.  Bank credit cards are issued by both banks and credit unions.

How many credit lines should I have?

The number of credit lines you have is important.  What are your financial goals?  Would you like to buy a home someday?  Speak with a Homewise Home Purchase Advisor or a home loan officer at a local bank or credit union that you trust.  Discuss your financial goals and ask how many open, active credit lines are recommended for home purchase.  Many lenders recommend two to three open, active credit lines in good standing.  At Homewise, we generally recommend two.  Based on our experience, strong borrowers tend to have two credit cards from banks or credit unions.  There are many factors that determine if someone is approved for a mortgage.  However, having two open and active credit cards in good standing is a key first step.  Strong borrowers usually have their lines for 12 months or more.

Tips to remember:

  1. Always pay your credit cards and loans on time.  Your accounts must be in good standing for them to benefit your credit.
  2. Pay more than the minimum payment on your credit card each month.
  3. If your goal is to build credit, leave a balance of $5 dollars on your credit card each month.
  4. Do not use your credit card for purchases you cannot afford.  Use your card to pay bills you would normally pay, and then pay your card down as soon as the bill arrives.
  5. Never close a credit card.  When you close your credit card, you are basically closing down that history you worked hard to build.
  6. Speak with a Home Purchase Advisor at Homewise or a home loan officer at a local bank or credit union about home purchase and how to qualify for the best mortgage available.
  7. Don’t be afraid to ask questions!  Homewise is happy to help you successfully build credit and reach your financial goals so that you can become a successful homeowner.

Interested in creating financial goals or learning more about credit?

About the Author:
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Homewise helps create successful homeowners and strengthen neighborhoods in New Mexico. We do this through our comprehensive real estate and lending services designed to support working families and individuals. We are a nonprofit lender, also known as a Community Development Finance Institution (CDFI).

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