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Credit Cards, Auto Loans, and Student Loans Affect Your Ability to Get a Mortgage

If you’re thinking about buying a home in the next few years, there are a few things you should know about how different types of debt can affect your credit score. Some savvy financial planning can put you lightyears ahead when you’re applying for a mortgage down the road.

Installment loans (think auto loans, student loans, and mortgages) and revolving debt, like credit cards, can be used wisely to increase your credit score. The better your credit score, the easier it will be for you to get a mortgage and the more favorable terms you’ll get on that mortgage.

So, it’s worth your time to learn about how different types of debt can improve your credit score so that you’re ready to get a mortgage when the time comes.

How Debt Affects Your Credit Score

Your credit reports at the three national credit bureaus (Experian, Equifax, and TransUnion) are a record of your history with all the debt you’ve ever had. They document your payment history and the details of your loan.

Installment loans and revolving debt affect your credit score differently, but both can help you improve it over time. Different types of debt affect your credit score in slightly different ways.

Installment Loans

An installment loan is when you borrow a certain amount of money and pay it back in installments over time. These payments are usually made on a monthly schedule and are most often the same amount each month. Mortgages, auto loans, student loans, and personal loans are all different kinds of installment loans.

How Installment Loans Can Improve Your Credit Score

If you have only credit cards, adding an installment loan like an auto or personal loan can actually improve your credit. Having a mix of debt types is preferable to having just one type of debt.

If you get an installment loan to pay off credit card debt, your score may actually improve. This is because moving credit card debt to an installment loan reduces your credit balance relative to your credit limit, which is a large factor in your credit score.

However, remember that these improvements are usually steady gains over time rather than sudden jumps in your score.

Installment Loan Tips

First, make all of your payments on time. If possible, set them up for auto payment so there’s no chance of missing them. Payment history is one of the biggest influencers on your credit score, so even one missed payment could cause a large drop.

Also, keep in mind that you might see a short-term reduction in your credit score when you first apply for and are approved for an installment loan. This is because the lender must make a hard inquiry on your credit, but it’s also because borrowers who take on new debt are more likely to default on their other loans. Just remember: your score will usually rebound within just a few months.

Last, if you’ll be applying for a loan before applying for a mortgage, it’s usually wise to space out the loan application process by six months to a year so that your credit scores can rebound between the first loan and the second.

Revolving Debt

Revolving debt includes credit cards and store cards that allow you to charge up to a certain amount on a revolving basis. Unlike installment loans, the amount you owe each month varies.

How Revolving Debt Can Improve Your Credit Score

If you’re not ready to get an installment loan, or if you don’t have much of a credit history, a credit card can put you on the fast track to establishing some. It’s a good way to show that you know how to manage debt without having to incur interest charges.

Revolving Debt Tips

First, you’ll want to keep your balance fairly low—around 30% of what you can borrow, according to most experts. This is your credit utilization ratio, and it’s an important factor in your score. You can’t max out your credit cards and have a good score.

Next, always pay on time. If you can, set up auto payment so that you’ll never miss a payment. If you want to avoid interest charges, pay off the statement balance in full each month.

If You’re Ready for the Next Step

If you want to do some more planning to make sure you’re ready to get a mortgage when the time comes, I hope you’ll give me a call! I’m here to explain the process and help make it easier for you.

“Faye helped me purchase my first home last year. She was very professional and worked very quickly to help me procure financing. She made herself available around my schedule and took the time to explain my options for financing to help me get the lowest rate possible. Would highly recommend her to anyone looking for someone that is professional, highly knowledgeable, polite, and responsive.”

- James Z.

“This review is about Mark and Darci Richardson from CSMC Mortage in Simi Valley. This team is the BEST! For the past 12 years our home was "underwater" due to the "crash" in 2007, and unable to do anything with the mortgage except pay it. These two kept on top of things and finally the house qualified to REFI. We just completed everything and it closed last week... and they saved us over $900 a month!! That's a huge savings for a couple of senior citizens! We are SO happy now and finally can breathe. Thanks to Mark and Darci and CSMC Mortgage for following through, jumping through all the hoops necessary and helping us out! I can't recommend them more... they are the BEST!!!”

- Shari S.

“ My experience is always fantastic & seamless. Mayen Grigorian is a true professional. He’s honest, he goes above and beyond, he’s efficient, always available and knowledgeable. I never have to call for updates he beats me to it and sends updates regarding the loan. Our clients are very happy and we’re very happy! Five star service, I can’t say enough good things about Mayen as a person and a professional. Hands down! He’s The Best!”

- Taline S.

“CSMC is always our go to lender. Denise Bizzy is fabulous. She really went the extra mile trouble shooting solutions to problems our client had. I do not believe another lender would have been able to pull this off. Five stars for the A+ service from Denise Bizzy and CSMC Mortgage!”

- Mark L.

“Mark, Darci & Co were wonderful to work with! They were responsive, managed a complex buying situation with ease, incredibly communicative and always ensured I was caught up with what was going on and where I was in the process. Heavily recommend!”

- Zach J.

“Darci, Mark and their team of professionals made the purchase for our amazing buyers absolutely seamless. The level of service they provide is second to none! They delivered the best rate and the best terms for the clients. Mark and Darci are very transparent with their fees and have a stellar reputation in the community. I highly recommend Darci and Mark for all your mortgage needs!”

- Gabby G.

“ Mario provided excellent service. Not only was he professional and helpful, but the personal support and reliability was something hard to find these days. I will not be using anyone else and have confidently referred him to friends and family.”

- Heather C.

“Laura Hertz is the best lender I've ever worked with in my 25 years as a Realtor. I never have to worry that she has things handles and she always performs in the best way possible. I also know that she is an advocate for my buyers and not only does she meet their expectations but she exceeds them! She is my lender for life!”

- Paula K.