Building Credit History Myth: Why You Don’t Need to Use Credit to Qualify for Future Home Loans

People tend to offer this standard advice; “Having no credit is like having bad credit.” Those people are usually creditors trying to convince you to take out a loan or open a charge account.

Actually having no credit history is a good thing. It means you are not in debt, you pay with cash and never leave an outstanding balance on your credit card. If you are planning to apply for a mortgage some day, follow these tips to make sure you will qualify:

  • Maintain steady employment. You need to work at a job for at least two years to qualify for a mortgage loan. That doesn’t mean you have to be married to your company. But if you flit from one job to the next and never have a steady income, lenders won’t look promisingly at your job history. Make sure if you do leave your employer, it’s for a good reason. Either a promotion, a pay increase or a position in a line of work where you see a future.
  • Pay your landlord on time. This will probably be the first person lenders call to inquire about your financial history. If you don’t pay your rent on time you’re not likely to make your mortgage payment on time either. The worst thing you can do for your credit is to get evicted. If you feel stretched with your rent payment, start looking for a cheaper place, but don’t break your lease in the process…It could appear on your credit report.
  • Pay your entire credit card balance every month, and avoid credit card debt. Don’t listen to anyone who tells you that to qualify for loans, you need to be able to pay off debt. You do need to pay off debt…But it’s much better never to accumulate it in the first place.
  • Don’t take out car loans. Instead, pay cash for an older, but still reliable vehicle. If you get in trouble on your auto loan and the car gets repossessed, that’s another big red flag on your credit report. It’s better to avoid car loans completely. Put the interest you saved towards the down payment on a home.
  • Never pay utility bills late. Not only will you keep your electricity, gas and water turned on, but those companies won’t report any late payments to the credit bureaus either.
  • Set up an emergency fund. You’ll need at least three to six months salary saved up. Don’t count on a credit card to help you through bad times. Your financial situation will get even worse if you start putting everyday expenses on a card with a 20 to 30 percent interest rate.

Mortgage lenders are tightening their belts these days. And the situation is not likely to change anytime soon. So, if you plan on buying a home in the next five years, your credit history needs to look squeaky clean. Remember, the best credit to have is no credit.