Adding New Credit Will Increase Your Monthly Liabilities

When attempting to build credit for large purchases such as a mortgage, consumers often elect to add themselves to one or more credit accounts of a spouse, family member, or a friend.

Doing so will effectively add the credit history of each credit line you add your name to your credit report. If the history on the added credit line(s) is positive, your credit score should be positively affected.

While this is a simple way to “build” credit and get some decent credit history under your belt, it does come with added monthly liabilities, and though you may not necessarily be the one paying the bill each month, a potential bank or lender will still hit you for a portion, if not all of the monthly payment of any account listed on your credit report.

And any new payments you are responsible for will drive up your debt-to-income ratio, or DTI which would make it tougher for you to qualify for a mortgage. Imagine if you had a 690 fico score, but you wanted to bump it up over the 700 range. You decide to add your name to your spouses’ car payment which is $600 a month. Doing so bumps your credit score up to 705, and you decide to apply for a mortgage.

The bank issuing the mortgage decision must now factor in that $600 car payment to your monthly liabilities. With the car payment now factored in, your DTI could jump up over the maximum, and you may be denied financing despite your improved credit score.

While credit is an important aspect in achieving favorable financing, it can have unforeseen effects on other decisive factors involved in the lending process, so always make sure you have enough income to take on added liabilities.

Do note that if you add your name to a revolving account such as a credit card with no balance, you should be able to avoid any income-related problems during the lending process. The above applies to installment accounts that have a recurring monthly payment, such as an auto loan.

Related Topics:

1. The Credit Score Black Market: Buying and Selling Trade Lines
2. How to Add Items to your Credit Report
3. A Simple, Quick Way to Build Credit
4. What Credit Score Do You Need to Buy a Car?
5. Order a Free Credit Report Long Before Searching for a Mortgage