Preparing for a Construction Loan: Get Your Credit Card House in Order

When you decide to build a new home, it doesn’t just happen overnight. Most home buyers that are thinking about building a home have been contemplating it for six months or even years. It’s the same with getting a construction loan. You should start thinking about getting your financial house in order well before you apply for a construction loan. While reviewing house plans, looking at home elevations, and picking colors are the exciting part of building a new home, one of the first things you should do is understand your current credit standing. A large part of most home buyer’s credit picture is their credit card debt. Credit card utilization is one of the biggest items that impacts your credit score. A good credit score is the key to success when financing the construction of your new home. However, while good credit opens the door to building your custom dream home, poor credit can close it. 

What is Credit Card Utilization? 

Credit utilization is simply the percentage of your credit limit used across all credit cards that you have. To calculate it, take the amount of debt you have outstanding on all of your credit cards and divide it by the total of your credit limit on all cards. It is one of the most important factors in determining your credit score. Because a high utilization rate could indicate you’ll have trouble paying your bills on time, a lower utilization rate is generally best for your credit score. 

RELATED: THE SEVEN STEPS OF MODULAR HOME CONSTRUCTION FINANCING

You may have heard that you should keep your credit card utilization under 30 percent. While 30 percent is perceived as the common target, mathematical calculations involved in credit scoring can’t be applied universally. However, if you want to be more consistent with the actual workings of the credit score give yourself some room and target a goal of 25 percent as your credit utilization rate. 

6 Ways to Impact Your Credit Card Utilization 

Lowering your credit utilization rate is a great way to boost your credit. The great thing about improving your credit utilization rate is that its impacts are almost immediately on your score. Because most credit card companies report to the credit bureaus each month, you will typically see the impact within 30 days or less on your score. For items like a late payment or a bankruptcy, it can take years to see the impacts of those items disappear from your credit score. 

Whether it’s for a quick boost or you want to learn how to better manage your credit, here are six ways to lower your credit utilization rate. 

1. Pay down your balance early – One tricky point about credit card utilization rates is that your usage depends on the balance that your card’s issuer reports to the credit bureaus, not how much you spend each month. Those two numbers aren’t always the same. Typically, issuers report the balance at the end of your billing cycle. Make sure that you pay down part, or all, of your balance before issuers report your balance for the billing cycle. If you can do that your credit utilization rate for that card will go down. 
2. Decrease your spending – If you’re working to pay down credit card debts and can’t afford to make partial or full payments early, it can be helpful to stop using your credit cards to make purchases. Otherwise, your new purchases may offset your payments, which means your credit utilization rate won’t go down. Try switching to a debit card or cash for your normal purchases. As you continue to make credit card payments to pay off debt, your credit utilization rate should drop. 
3. Pay off your credit card balances with a personal loan – Because credit utilization rates are a reflection of how you use revolving credit, you could take out a personal loan, pay off your credit cards and effectively move the debt to an installment loan. Another upside of this is that you could potentially get a lower interest rate than your credit cards. There can be some drawbacks to this approach. You may have to pay fees on the money you borrow. In some cases, to qualify for a personal loan, you need to have excellent credit. If you don’t, the rate on the new loan could be higher than your credit cards.  
4. Increase your credit limit – Another way to improve your credit utilization rate is to increase your credit limit. If you can’t reduce your debt then the other way to lower your utilization ratio is to increase your credit limit. Most cards issues allow you to request a credit limit increase online. With an established credit card account, you may able to ask for increase every six months. Just remember, a credit limit increase request could trigger a hard inquiry. This could slightly ding your credit. With a short credit history, this could hurt you more than the credit line increase helps you. 
5. Open a new credit card – Another method to increase your available credit is to open a new credit card. Because you won’t necessarily know what the credit limit will be until after you’re approved you won’t know if the hard inquiry on your credit is worth it. Apply for a card that you believe you have a strong chance of being approved for before applying.  
6. Don’t close unused cards – A mistake that many people make when trying to get their credit house in order is to close credit card accounts they don’t use. But closing an account can also lower your available total credit and increase your credit utilization rate. Be sure to understand the impact before canceling the card! 

The Bottom line 

When you are working towards getting that construction loan for your custom modular home, managing your credit utilization rate can be a quick and simple way to help improve your credit score. Remember to focus on both parts of the equation. Lower your balances and increase your credit card limits and do it with the least impact possible from hard inquiries. Don’t forget that utilization is still only one part of our credit card picture. Remember that any balance will impact your debt ratio. 

Don’t wait until you apply for a construction loan to start. It is never too soon to start improving your credit. With some effort and research, you can learn how to improve your score to get the best terms and rate for your new home loan!