How To Use Secured Credit Cards To Build Credit For A Mortgage

Gustan Cho Associates are mortgage brokers licensed in 48 states

This article is about How To Use Secured Credit Cards To Build Credit For A Mortgage

In this article, we will teach mortgage borrowers on How To Use Secured Credit Cards To Build Credit so they can qualify for a mortgage.

  • You can have PRIOR bad credit and qualify for a home loan
  • However, you need timely payments in the past 12 months to qualify for a mortgage
  • Outstanding collections and charged-off accounts do not have to be paid off to qualify for a mortgage
  • Lenders do understand people go through periods of bad credit due to extenuating circumstances such as job loss, business loss, death in the family, and medical issues
  • However, people do recover from a financial crisis
  • Once they recover, lenders want to see they have re-established themselves with new credit
  • Late payment after a period of bad credit, bankruptcy, or foreclosure can mean the kiss of death
  • Borrowers who have late payments after bankruptcy, foreclosure, or periods of bad credit are often referred to as second offenders and it will be difficult to get a mortgage
  • However, Gustan Cho Associates are experts in helping homebuyers with bad credit
  • If there is a will, there is always a way
  • It is possible to qualify for a mortgage with PRIOR bad credit
  • Remember the word prior

Timely payments in the past 12 to 24 months is required to get an approve/eligible per automated underwriting system.

Qualifying For A Mortgage After Bankruptcy And A Housing Event

Borrowers can qualify for a mortgage after bankruptcy, foreclosure, deed in lieu of foreclosure, short-sale.

  • However, there are mandatory waiting period requirements after bankruptcy and/or a housing event
  • During the waiting period, lenders want to see borrowers have rebuilt their credit and have been timely in all the minimum debt payments
  • Late payment after bankruptcy and/or foreclosure is normally a deal killer
  • However, one or two late payments after bankruptcy and foreclosure may be allowed depending on the circumstance
  • Consumers need to realize the importance of good credit and timely payments
  • Monitor your minimum monthly payments religiously
  • Monitor your credit report the same you would monitor your bank accounts
  • Secured credit cards are the best tools to build credit and raise credit scores
  • Good credit and high credit scores mean lower mortgage rates on your home loan

In this article, we will discuss and cover How To Use Secured Credit Cards To Build Credit For A Mortgage.

Learning How To Use Secured Credit Cards To Build Credit

Many consumers who have gone through periods of bad credit, bankruptcy, foreclosure, deed in lieu of foreclosure, short sale want nothing to do with credit after they get on their feet.

  • Many religiously want to purchase everything with cash and/or debit cards
  • Unfortunately, this is not good
  • Our economy revolves around credit
  • Many employers use an applicant’s credit scores and payment history as part of the recruitment process
  • Therefore, credit is essential
  • This holds especially true when applying for a mortgage
  • People can get credit after bankruptcy, foreclosure, and periods of bad credit
  • The easiest and fastest way to rebuild credit is with secured credit cards
  • The ideal number of secured credit cards to get is three with a $500 credit limit
  • Besides secured credit cards, consumers should get one installment credit builder tradeline
  • The team at GCA Mortgage Group are experts in helping potential mortgage borrowers with maximizing their credit scores

The team at Gustan Cho Associates have helped countless borrowers boost their credit scores. High credit scores mean lower mortgage rates. Higher credit scores mean low insurance premiums. High credit scores mean lower private mortgage insurance.

Secured Versus Unsecured Credit Cards

What is the difference between secured versus unsecured credit cards

Secured credit cards work the same way as unsecured credit cards.

  • However, the main difference with secured credit cards is a deposit is required by the credit card company
  • The deposit is used as collateral by the credit card company
  • The credit card company will issue a credit limit equal to the amount of the deposit
  • The deposit can be as low as $200 or as high as over $10,000
  • In the event, if the credit card holder defaults on the secured credit card payments, the creditor will hold onto the deposit
  • In the event, if the cardholder cancels and/or close the card after clearing the balance in full, the creditor will refund the deposit in full

Credit card companies will increase credit limits for secured credit cardholders showing a timely payment history without requesting additional deposits.

How To Use Secured Credit Cards To Build Credit And Qualify For Unsecured Credit Cards

Secured credit cards are the easiest and fastest way of rebuilding credit for those with bad or no credit.

  • Once you have secured credit cards seasoned for at least a year, you can easily qualify for unsecured credit cards
  • When getting secured credit cards, make sure the credit company reports to all three credit bureaus
  • It makes no sense to go through the trouble of getting secured credit cards and not getting reporting to all three credit bureaus
  • Secured credit card companies do charge high interest as well as annual fees just like unsecured credit cards

Prepaid credit cards are not secured credit cards. Prepaid credit cards do not report to any credit reporting agencies. Prepaid cards are reloadable debit cards, not credit cards. Prepaid credit cards are great to use to control and manage spending.

Components Of Consumer Credit Scores

Credit scores fluctuate constantly. There are several components that make up consumer credit scores. The two most important components are the consumer payment history and credit utilization on revolving accounts. Credit utilization is derived by taking the credit card balance by the credit card limit. To get the maximum credit score possible, try to have a credit utilization of less than 10%. The payment history and credit utilization make up 65% of the consumer’s overall credit scores.

See the chart below to see the components that determine consumer credit scores:

Although it is a secured credit card, the credit card company will report your timeliness and lates on all three credit bureaus.

The Importance Of Timely Payments

One late payment in your payment history will plummet your credit scores.

  • A late payment on your credit report will stay on your credit report for 7 years
  • The lower your credit utilization, the higher your credit score
  • Lower credit utilization shows lenders and creditors that you are not living check to check
  • Try to have a 10% credit utilization by the end of the reporting cycle to have the highest credit score possible
  • The longer you have your credit card, the stronger your credit profile is
  • 15% of the overall credit score consists of the longevity of the credit tradeline
  • Try to have a variety of different types of credit tradelines
  • 10% of your credit scores consist of a mix of credit tradelines
  • For example, having revolving credit accounts, auto loans, mortgage, and installment loans will be a good mix of credit tradelines

Having three secured credit cards and a credit builder loan will be a good mix of credit tradelines to the road of great credit.

Shopping For The Best Secured Credit Cards

The ideal number of secured credit cards to maximize credit scores and rebuild credit is three. The ideal credit limit is $500 per secured credit card. Secured credit cards work the same as unsecured credit cards. Some have annual fees while others don’t. Make sure the credit card companies report to all three major credit bureaus. Some may only report to one or two credit bureaus. You would want all three credit bureaus reporting your timely payment history to build credit. Capital One and Discover Card are two major credit card companies that offer secured credit cards. Discover Card and Capital One also reward their secured credit cardholders who pay their debts on time with additional credit limit increases without requesting additional deposits. Discover Card offers reward points and cash-back for using their card. The Self Visa® Credit Card offers consumers credit cards instead of putting down a security deposit with the savings you’ve built up with your Credit Builder Account so there’s no extra out-of-pocket cost.

Credit Builder Accounts

What are loan wizard accounts?

If you do get denied for a secured credit card, try to get a Self Visa® Credit Card because once you’re eligible to apply for it, you’re approved.

To become eligible, you need to:

  1. Opening Self Credit Builder Account
  2. Make at least your last three monthly payments on time
  3. Have $100 or more principal in your account
  4. Have no outstanding fees

Credit Builder Accounts is an installment loan with an FDIC bank. You can open a credit-builder account with as little as $25 dollars per month. The bank opens up a certificate of deposit (CD) for you and you pay the bank $25 per month or whatever amount you decide on. Once you make 12 payments, the CD expires and the money is returned to you with interest. The advantage of the credit-builder program is the bank reports your monthly payment to all three credit bureaus. This is a great way of building credit. The program offers secured credit card programs which you can use the CD as your deposit. Many of our clients at Gustan Cho Associates have credit scores over 700 FICO in just one year after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale by following the above credit program. Never miss a monthly payment and monitor your credit scores religiously.