Small House on Stacks of Hundred Dollar Bills

The Most Expensive Purchase of Your Life

Buying a home is the most expensive purchase most of us will ever make. When we buy a home, it is an investment that can help us create wealth and financial stability. But because homes are so expensive, we have to take out a mortgage. These loans can be as short as 15 years, but are most likely 30 year loans. Interest on a mortgage long can really stack up. It isn’t uncommon for people to pay hundreds of thousands of dollars in interest over the course of a loan. That’s why mortgage savings are a huge deal! And that will depend on your credit score. 

Use Credit Cards to Build Credit

Did you know that using a couple of credit cards in the right way for a few months before you buy a house can help you raise your credit score? And 40 points on your credit score can lead to huge mortgage savings!

Many people think of credit cards as a slippery slope into debt. But, credit cards can be powerful tools for building and improving your credit score. When used properly they let you control your credit score.

One way they do this is by providing you with the opportunity to establish a positive credit history. When you use a credit card responsibly by making timely payments and managing your balances wisely, it reflects positively on your credit report. Creditors and credit bureaus track your payment history, and consistently making on-time payments demonstrates your creditworthiness. This positive payment history can boost your credit score over time.

Our Credit Score Research

We have looked at millions (literally millions!) of credit files. Our analysis shows that if you can rack up 36 on-time payments and keep the utilization on your credit cards below 20%, you are almost guaranteed to have a credit score in the high 700s. You can get those 36 on-time payments by using a credit card monthly for 3 years or three credit cards monthly for 1 year. 

Additionally, credit cards can contribute to your credit mix, which is another factor that affects your credit score. Lenders like to see that you can handle different types of credit responsibly. Credit cards represent revolving credit, while other loans like mortgages or car loans are considered installment credit. By having a credit card, you diversify your credit profile, which can have a positive impact on your credit score as long as you manage it responsibly. 

Use Credit Cards Wisely

However, it’s crucial to use credit cards wisely to reap these benefits. Make sure to pay your credit card bills on time and avoid carrying high balances, as this can have a detrimental effect on your credit score. Responsible and disciplined use of credit cards can help you build a strong credit history and improve your overall creditworthiness. 

If you do these things, a credit card can help you improve your credit score which allows you to be eligible for better interest rates when buying a home. This can *literally* save you tens of thousands of dollars. 

Mortgage Examples

Consider this example of how interest rates affect how much interest you pay over the life of a mortgage: 

Let’s say you’re buying a home with a 30-year fixed-rate mortgage for $250,000. 

Here are two scenarios: 

Scenario 1: You secure a 4% interest rate. 

Scenario 2: You manage to secure a lower interest rate of 3%. 

Now, let’s calculate the total interest paid and the monthly payments for each scenario: 

Scenario 1Scenario 2
Loan Amount$250,000$250,000
Interest Rate4%3%
Loan Term30 years30 year
Monthly Payment*$1,193.54$1,054.01
Total Interest Paid$179,673.27$150,887.96
*Monthly payment is principal and interest only. Taxes and Insurance are also included in most mortgage payments.

Scenario 1

In Scenario 1, with a 4% interest rate, your monthly mortgage payment would be $1,193.54, and you would pay a total of $179,674.40 in interest over the life of the loan. 

Scenario 2

In Scenario 2, with a 3% interest rate, your monthly mortgage payment would be lower at $1,054.01, and you would pay a total of $129,443.60 in interest over the life of the loan. 

Mortgage Savings in our example!

The difference in monthly payments between the two scenarios is $1,193.54 – $1,054.01 = $139.53. So, by securing a lower interest rate of just 1%, you save approximately $139.53 per month on your mortgage payment. That can mean a significant difference in your day-to-day finances. Think what you could do with that extra money every month!

Over the 30-year term of the loan, that adds up to a substantial savings of $179,673.27 – $129,443.60 = $50,230.80 in interest payments. One percentage point drop in interest rate saves you over $50,000

One or two percentage points can translate into significant savings on your mortgage. Saving that kind of money is worth preparing your credit score with the use of credit cards before you apply for a mortgage. 

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Jonathan Walker