Careful Credit Card Management and Your Home Purchase
Careful credit card management could mean the difference between qualifying for a home mortgage and not qualifying. And, when you do qualify, it can mean a difference of a point or two in the interest rate you’ll pay.
Why? Because the way you handle credit cards has a large influence on your FICO scores. And your FICO scores are one of the three most important determining factors when you apply for a home mortgage.
Monthly income and the stability of your employment are the other two factors.
If you’re thinking of a home purchase, now is the time to get a copy of your credit report and check your scores. Even if you pay all of your bills on time, the way you handle credit cards could be pulling your FICO scores down, and if that’s the case, you need to take some steps.
First, check your current card balances against your credit lines. If your balances are over 30% of the credit line on any one card, they are pulling your scores down. To correct this, you can do one of three things:
Ask your credit card issuers for a credit line increase – but don’t use it
Move your balances between cards so that each shows less than 30% of the available credit.
Choose and apply for a new credit card, then don’t use it except to transfer balances.
It seems silly that you can owe the same amount of money and move it around to increase your credit scores, but that’s the formula.
Misinformation to disregard:
When mortgage lenders attempt to counsel their customers on how to raise credit scores, some of them make a big mistake. While they are correct in telling customers to pay down debt, some also counsel people to close unused credit card accounts. This is a bad idea and will actually lower your scores.
The FICO formula wants to see that you are using only a small portion of the credit available to you. If you close an account you reduce that available credit.
Also, as nice as it is to pay less interest, it is a bad idea to move all of your debt to one card with lower interest – unless you can move it and still remain under 30% of your available credit on that card.
Of course you should pay every credit card billing on or before the due date – and if you pay on line, be sure you pay by the correct time of day if you pay on the due date. Payments made after a set time of day are posted the following day and will trigger both a late charge and a late notice on your credit report.
