It’s the spring real estate market and you’re thinking about buying a home. Congratulations! Buying a home is a wise financial decision for most, and a great way to build your net worth in the long run.
When it comes to buying a home, your credit card is probably the last thing on your mind, so it may surprise you to hear that it can be a worthy ally on your venture into homeownership. Of course, it’s only when you use your credit card correctly. If you abuse your credit card, it could derail your mortgage application, but if you use it in a smart way, it can actually make your journey to being a homeowner easier.
Read on to find out how to take advantage of your credit card and avoid the pitfalls when buying a home.
Watch Your Credit Utilization
Credit utilization isn’t something we usually talk about around the dinner table, but it’s important when it comes to applying for a mortgage. Credit utilization is the factor that carries the second most weighting in your credit score after your payment history.
In case you’re not familiar with credit utilization, it’s a fancy word for your available credit. Your available credit is how much credit you’ve used. To figure that out, take your credit limits of all your credit cards and subtract the current balances of all your credit cards.
Ideally you’ll want to aim for a credit limit below 35 percent, but never go over 70 percent, even if you pay off your credit cards each and every month. When you use a high percentage of your credit limit, it makes lenders nervous and drags down your credit score.
Being mindful of your credit utilization can really save your bacon. It’s fairly common for new homebuyers to purchase furniture before moving into a new home. However, if your credit score and debt ratios are already on the borderline of qualifying, it could lead your application to being declined. In that case, it’s best to wait until after your property has closed to make that purchase.
Moving Expenses
Whether you’re DIY moving or hiring movers, your credit card comes in handy. When you’re moving yourself, many credit cards offer the added protection of auto insurance at no extra cost. Since getting into an accident in a moving truck is no laughing matter, it’s best to phone to double check your coverage to be on the safe side.
Do you have a lot of stuff? Sometimes it makes sense to hire movers. Instead of writing the movers a cheque or paying them in cash, charge it on your credit card. If you run into a dispute with your movers that goes unresolved, you can always consider a chargeback to recover your money. However, it’s always best to try to resolve any issues with the vendor before doing a chargeback.
Home Inspection
A home is most likely the single largest financial transaction of your lifetime, so it only makes sense to do a home inspection. A home inspection is a visual inspection of the property to make sure it’s in good shape. A home inspection generally costs about $500.
Again, similar to movers, instead of paying in cash or writing a cheque, it’s a good idea to charge it on your credit card. You’ll earn some decent rewards out of it and help with your cash flow during an already expensive time. Just make sure you keep an eye on your utilization. If you’re getting close to the 35 percent threshold, it may be worth paying off your credit card early to bring it in line.
The Bottom Line
As you can see, your credit card can help you in many ways when buying a home. Use it smartly and it will be a huge asset, but use it with less care and it can hurt you. Happy home shopping!
