Credit Newbies and Home Loans

Written by Posted On Thursday, 29 December 2022 00:00

At a relatively young age, people can soon start receiving credit card offers. A lender can do a ‘soft’ credit check to see if someone might be eligible for a credit account. When the lender determines that it might be a good opportunity to provide someone with a credit account, they’ll send out an offer. For those who have yet to get their first credit card, this seems fairly enticing to some. Building credit at a young age is a good thing. But for some, it’s very possible this new credit account can lead to some unintended consequences. Credit is good, but responsible credit is better.

Here's one example. A young man gets a credit card offer online. He decides to apply and just waits to see what happens. Within just a few moments, he gets the result: Approved! A week or so later his credit card arrives in his mailbox. There’s a bit of excitement and he also just wants to go try it out. He heads over to his favorite diner, orders a burger and when finished hands the waiter a card. A few moments later the waiter arrives asking for his signature. Cool! he thinks. He’s got his first card and it works.

Here's what might happen though. He gets so excited about his new card that he tries it at other places. 

There’s also a new business suit he’s had his eye on but previously couldn’t afford. He bought it. The original credit limit was $1,000 and he was approaching it within the first few days. In fact, he really wasn’t paying attention to that and actually charged things that brought his balance above the limit. The original credit that got him his first card is being severely damaged.

When first time home buyers get ready to buy and finance their first home, one of the things to pay attention to is adding more debt which will reduce qualifying. Someone with additional debt might still very well qualify for a home loan, it's just that they’ll qualify for less. Getting and utilizing credit for the first time requires attention because acquiring so much new debt in a short period of time will give lenders pause. So much so that a lender might back away from making a credit offer in the first place.

If, say, one of your kids comes to you and is proud that they’ve got their first card, counsel them and let them know that credit is a good thing but when abused is a bad thing.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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