Should I finance a car to build credit for a mortgage next year?

Question

I'm hoping to purchase my first home next year, but I'm having trouble deciding on the best way to raise my credit score. Here is a summary of my current situation:

• Credit Score Estimates (via CreditKarma):
  • TransUnion: 736
  • VantageScore: 770
• Number of Credit Lines:
  • 3 credit cards
• Average Age of Credit Lines: 10 months
• Total Credit Card Limits: $6500
• Average Credit Card Utilization: 7%
• Percent of Payments Made On-Time: 100%

I'm young (21 years old) so naturally my credit history is nascent, but I think I've done a decent job so far maintaining my credit score. However, I would like to buy a simple condo next year ($75K-$100K) with about a 50% down payment on a mortgage. I'm hoping the large down payment will get me approved for the mortgage despite my thin credit history -- thus leaving me to focus more on how to bring down the interest rate.

I was thinking about applying for some more credit cards initially, but when my car broke down I realized that a car loan can also raise my credit score. The car I'm considering buying is about $6000, which I can easily afford to buy outright in cash thanks to a decent salary for my age ($50K/year). However, I'm afraid it may end up doing more harm than good given the short period of time before my intended application for a mortgage.

Should I still apply for a car loan, or would the increase in debt do more harm than the benefit of a year history of payments? Should I seek another "installment-type" credit line, or is the time period just too short to make any significant additions that would lower the interest rate of a mortgage?

Answer 1

The fluctuation of interest rates during the next year could easily dwarf the savings this attempt to improve your credit score will have; or the reverse is true.

Will the loan improve your score enough to make a difference? It will not change the number of months old your oldest account is. It will increase the breadth of your accounts. Applying for the car loan will result in a short term decrease in the score because of the hard pull. The total impact will be harder to predict.

A few points either way will generally not have an impact on your rate. You will also notice the two cores in your question differ by more than 30 points. You can't control which number the lender will use. You also have to realize the number differs every day depending on when they pull it that month.

The addition of a car loan, assuming you still have the loan when you buy the house, will not have a major impact on your ability to get afford the home mortgage. The bank cares about two numbers regarding monthly payments: the amount of your mortgage including principal, interest, taxes and insurance; and the amount of all other debt payments: car loan, school loans, credit cards. The PITI number should be no more than 28%-33% of your monthly income; the other payments no more than 10%.

If the auto loan payments fit in the 10% window, then the amount of money you can spend each month on the mortgage will not be impacted. If it is too large, then they will want to see a smaller amount of your income to go to PITI.

If you buy the car, either by cash or by loan, after you apply for the mortgage they will be concerned because you are impacting directly numbers they are using to evaluate your financial health. I have experienced a delay because the buyer bought a car the week before closing.

The biggest impact on your ability to get the loan is the greater than 20% down payment, Assuming you can still do that if you pay cash for the car. Don't deplete your savings to get to the 50% down payment level. Keep money for closing costs, moving expenses, furnishing, plus other emergencies. Make it clear that you can easily cover the 20% level, and are willing to go higher to make the loan numbers work.