How Credit Cards Can Help You Become A Homeowner
Guest Author: Stephen Weyman
Credit cards and homeownership are an unlikely pairing … how can these two things possibly be related?
More than you might think actually.
Credit cards are a powerful financial tool that not only will help solidify your credit score before you need that mortgage, but they can also assist you with your down payment and protecting your assets in your new asset at the time when you need it most.
Get Your Credit Score Ready
There’s no better tool for raising your credit score and building out a positive credit history than a credit card.
Even if your credit is bad, there are secured credit card options out there that will help you start to rebuild your credit when your choices are limited. Simply put down a deposit that matches your credit limit and you’re nearly guaranteed approval with some cards.
If you already have a good history of paying your bills, student loans, car loan, or other debts on time — then you already have a solid foundation for your credit history.
Next, you’ll want to take the time to find the right credit card for you. There are hundreds of credit cards on the market and you don’t just want to choose the first one that comes along. You also don’t need a credit card from your primary bank.
Start with a top ranking no fee credit cash back or rewards credit card. You won’t get the most rewards and perks, but you’ll never feel pressured to cancel it and they are typically easier to qualify for with lower minimum income and credit score requirements.
By keeping your first no fee card active for your entire life you’ll be increasing the average age of your credit accounts, which is a big positive factor for your credit score. It’s the gift that keeps on giving.
The simple rules are:
- don’t overspend,
- never come close to maxing out your credit limit,
- keep the card active with at least one transaction per year,
- and always pay your bill in full and on time every month.
Extra Money For That Down Payment
If you’re a saver, have your budget under control, and don’t overspend with debit compared to cash, then a credit card can help you collect extra cash for your down payment even faster.
If homeownership is the dream, then skip right past all the travel & rewards credit cards out there, but consider upgrading from your no fee cash back credit card to a premium cash back credit card.
You’ll rack up the cash nearly twice as fast, often get a sign up bonus, and the annual fee will be more than paid for by the extra cash you earn if you spend at least $1,500 a month on your card. Then, all the extra features, perks, and free insurance coverage that come with premium credit card are like icing on the cake.
Speaking of fast cash, you’ll want to funnel every single purchase through your credit card. Stop paying cash for that coffee and pack of gum. With tap & go wireless payments paying with your card is faster anyway.
Of course, the big purchases and monthly recurring expenses are what you want to switch to your card right away. Then, look for other creative ways to charge more on the cards like paying your university tuition, the down payment on your car (or the whole thing), or claiming medical costs through your insurance manually instead of letting your insurance company pay directly.
Don’t forget those business expenses either if you can reimbursed by your employer!
If you spend $2,000 per month on the top cash back card in Canada, that will net you $391 in cash rewards every year after you’ve already paid the annual fee.
How about that crummy no fee cash back card from your bank? It could be as low as $120, depending on the card, for the same spending — quite a difference.
An extra $400 per year towards saving for your down payment is nothing to sneeze at and that amount will skyrocket if you spend more than $2,000 per month.
Tip: As soon as you claim your cash back, be it a statement credit to your credit card or a direct deposit to your bank account, make a pledge to yourself that you will transfer the same amount to your down payment savings account immediately. Otherwise, your cash back will be frittered away and you’ll be no further ahead.
New House = New Stuff
You might be a strict Kijiji shopper, but most people tend to buy at least a few new items when they move into a new house.
Let’s be honest … that can get really expensive really fast. Don’t make the mistake of charging all that to your credit card without a plan to pay it off! You need to plan and save for those purchases first.
But, when you are ready to buy, there’s nothing worse than that new stuff breaking, getting accidentally damaged, or even stolen.
Credit cards can help that too!
Most premium credit cards, and many with no annual fee, come with free insurance coverage that typically includes 90 days of purchase protection and up to 1 year of additional warranty on all your purchases.
Cards with the best insurance coverage will double that to 180 days of purchase protection and up to 2 years of extra warranty — but they are pretty rare.
How does it work though?
All you need to do is charge the full amount of anything you buy for your new house on your credit card. You can then pay it off immediately if you want to. Then, simply keep your receipt and a copy of the original warranty certificate for the item you bought and you are automatically covered.
If something goes wrong and the manufacturer’s warranty is expired, you simply call your credit card company who will refer you to the insurance company they deal with. You open a claim, get your item fixed or replaced according to the original terms of the warranty, charge that cost to your credit card, then complete the claim forms to get reimbursed for the full amount.
I did this when my new clothes dryer conked out which completely saved me from the $350 repair bill.
Purchase protection is even better. If nearly anything happens to your new purchase — damaged, lost, or stolen — it’s covered.
Again, charge the full cost to the card and you are automatically covered, just keep the receipt. Kids colour on the new sofa? Should be covered. Drop your new tablet into the toilet? Should be covered.
You do need to read the insurance certificate that comes with your card because there is a relatively short list of exceptions and exclusions that varies with each card and policy — but in most cases you are covered.
Credit Cards Can Help With Houses — Use Responsibly
Credit cards are a powerful financial tool, much like a double-edged sword. When used in the right way, they can help you out a great deal. When use recklessly, they can certainly ruin your day or your year.
I trust after reading this article you won’t grab the sword by the blade instead of the handle and pledge to never carry a balance on your card and keep your spending under control. If you can do that, you’ll be in your new house much faster and much easier than if you didn’t use one.
Don’t forget to put those closing costs on your credit card too bee tee dubs.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.