As a large family, we are always looking for ways to stretch, save, or appreciate our capital. One easy way to do that is buy a home instead of renting.
Our first adventure was a few years ago. We got preapproved for a loan, picked a house, got an inspection. We were so excited. Then we got a phone call from the bank. Our loan officer had been fired for illegally preapproving people. People like us. Our credit report was full of surprises, and the loan officer was going to ignore them.
So after we got over the shock of dealing with a dishonest banker, we got to work clearing our debt. We paid off everything, including our car.
So we took our shiny, clean, and debtless credit report to a bank. We had paid off quite a chunk of debt over the last few years and expected to be commended and have a great credit report.
Turns out our credit was worse than before! We hadn’t financed something in over a year! We hadn’t missed payments because we owed no payments to anyone.
That’s when the loan officer explained about revolving credit.
Revolving credit is credit which automatically renews once the debt has been paid, like a credit card.
Without debt to show you are making payments or revolving credit, your credit score will go DOWN, even if you incur no new debt.
A mortgage is the only debt I am content with, but in order to get a mortgage and ultimately, a home, I must have a good credit score. Buying a home with cash isn’t possible for us now.
So here is the trick I have learned about credit cards and credit scores: It’s all about utilization rate.
Utilization rate is the percentage you spend compared to your total credit. The lower it is the higher your credit score. For example, if you have a credit line of $500 and spend $400 of that, your utilization rate will be 80% and will push your credit score DOWN even if you pay off the balance at the end of the month. However, someone with that same line of $500 who only uses $100 will have a utilization rate of 20% and their credit score can go up, if they make their payments on time.
Make your payments on time, spend very little on credit, and still live within your means in order to ensure your credit score is an appropriate reflection of you.