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The Credit Building Trick That Won't Help You Buy a Home

Scott Sheldon

Planning to apply for a mortgage? If yes, an authorized credit card can be a double-edged sword.

An authorized user credit card is opened for many reasons. For example, maybe your parents add you to one of their credit cards as an authorized user to help build your credit score. While this might improve your credit score, that’s not the only thing lenders will look at when examining this account for your mortgage application. In the example of a parent adding you to their credit card account as an authorized user, consistency with the age of the account and the age of the borrower needs make sense. For example, it would not make sense for a 25-year-old mortgage applicant to have a credit account that is 15 years old. A lender would ignore that account in the mortgage approval process, and here’s why.

The 2-Trade Line Minimum

A trade line is simply an industry term for a credit obligation. It can be a credit card, a student loan, an auto loan, any open loan account really, ideally in good standing. A closed out credit card does not count as an active current trade line and unfortunately has no financial significance to a mortgage lender deciding whether or not to grant you a home loan. Trade lines within the lending industry are also sometimes dubbed credit accounts.

When applying for a mortgage, a lender is going be looking for at least two open trade lines. Without any active trade lines, you probably don’t have a credit score, or if you do have a credit score, it is probably very low, because there is no active credit account supporting your credit score, a necessity in securing a mortgage. In order to get a mortgage these days, you’re going to need a credit score of at least 620 for most loan programs, including the conventional and FHA types.

Another Way an Authorized User Account Could Backfire

Authorized user accounts may carry some financial benefit for improving a credit score, but if you are on someone else’s account, and they carry a balance with the subsequent monthly payment, your debt-to-income ratio could be adversely affected, resulting in less borrowing ability when you apply for a mortgage. You might not be able to purchase as much house or qualify for as much loan.

A simple remedy to the situation would be to have the other party simply remove you as an authorized user, and then your mortgage company can omit the liability from your name and subsequently the entire credit account.

What If You Don’t Meet the 2-Trade Line Minimum?

The simple fix to meeting the minimum is to open a new credit card.

A secured credit card would be an ideal approach if you can’t qualify for a standard credit card. The idea here is to get a trade line in your name alone without the authorized user status. Doing so, if you are approved, would show a short history of the account as though it was just opened, however it still does count as an active trade line to meet mortgage standards thus allowing you to meet the two trade line requirement and/or support and better credit score.

You would need to let this account age for about two months if your credit score is already above 620 (and six months if it’s lower than 620) in order to use it to qualify for a mortgage, although it will begin impacting your credit score immediately.

To Get a Loan, Remember the Basics of Good Credit

Authorized user accounts are sometimes billed as a way to “trick” lenders by piggybacking off of another person’s good credit. But lenders aren’t tricked by this, they have too much information.

The credit score generated from each credit bureau for mortgage-related purposes is not the same credit score you might get when you request one from a credit bureau or when an auto lender pulls your score. When lenders pull your credit scores and reports, they get all three scores, one from each bureau — a tri-merge credit report. By applying for credit on your own, you can build your own credit score, and make it easier to get an additional trade line you might need for loan approval down the road.

The basics of good credit rarely change, so if you need to build your credit before applying for a mortgage, here are some god tips:

Monitor your credit. You have to know where you stand so you can know where you need to go. You can check your credit reports for free once a year from each of the major credit reporting agencies. And you can see your credit scores for free every month on Credit.com.

Talk to mortgage lender. Ask your lender if there’s anything you can do to increase your score and/or if you’re lacking in trade lines if there is an alternative option to get your loan approved. Some lenders will make exceptions and allow just one trade line if you have a long history of on-time payments

Treat your accounts well. Once approved for a credit account, pay your bill on time. And, if possible, pay off your account balance in full every month. Over time, this will do wonders for your credit score.

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