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The area that I am focusing on is related to get lower interest rate when applying for a house loan 4-5 years down the line.

After graduating from school and having a job, the credit score> generally is not that good. So, if we plan to buy a house after 4-5 years is it advisable to take small planned loans and pay it off to increase the credit score?

With planned I mean, we do not need the loan for now, but we can afford to pay a smaller interest than paying a higher interest on a huge amount of the loan for the house later.

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There are multiple answers here which discuss credit scoring criteria. A good score doesn't require that you pay interest on a loan. I like that you're thinking about this so far in advance. A credit inquiry does impact your score for 2 years. I refinanced my mortgage in November 2011, and the result was nearly $5000 less interest per year. Along with that, came a ding to my report, it fades overtime, and falls off after the second year.

I do recommend finding the cards that you plan to use for a long time. (again, other posts here discuss ideal cards) For me, it was a card that gives 2% to my daughter's 529 college account. For you, a different cash back card might be better. Either way, enough available credit so you don't get a bill representing more than 19% of the total credit lines. Then pay in full. Don't apply for any new credit starting 25 months prior to house hunting. And plan to put 20% down.

Average age of accounts helps your score, so constantly opening new accounts and cancelling old is bad.

A few related answers help provide a greater understanding of credit scoring -

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You don't need to pay interest to have a great credit score. You need to use credit wisely. What you have now is a thin file, so you need to beef it up.

If you have a student loan make the payments on time. If you can pay it all off by the time you need the home loan that will give you ability to afford the size home loan you need.

If you must get a car loan, again make the payments on time.

These types of loans will influence how much of your income can be applied to your home expenses. So you would like them as small as possible when you are applying for the home loan.

Get a small number of credit cards. Use them. But pay them off each month. You will spend zero on interest but the wise use of the credit will help your score.

Consumer loans frequently have higher rates compared to the ones for mortgages. Getting the loan just for the privilege of paying interest is expensive. Even the deals offered by some stores, no interest for 12 months, can be a trap. If you are even one day late they will demand that you pay all the forgiven interest, which may be at 18% or higher. You generally have to get a store credit card to get these deals, that just adds to your pile of credit cards, of course it is a credit card that can only be used at one place.

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