Avoid These 5 Credit Card Mistakes
Using a credit card regularly and responsibly is one of the most effective ways to boost your credit score before applying for a mortgage. But even though both secured and unsecured credit cards can be a huge help for building good credit, a few credit card mistakes could lower your score and prevent you from getting the mortgage you want. Because being aware of the most common credit card mistakes should help you avoid them, below we’ve gathered the top 5.
Getting a New Credit Card Right before Applying for a Mortgage
Besides the fact that a credit card allows you to borrow money up to a certain limit, it provides a few more benefits, including:
- It increases the total amount of available credit, which in turn decreases your credit utilization ratio; a lower credit utilization ratio always has a positive effect on your credit score.
- It improves your credit mix, which is an important part of your score. Opening a new credit card, which is a form of revolving credit, may be helpful if most of your existing accounts are installment loans.
- It can help you establish a strong payment history, which will also improve your score.
On the downside, opening a new credit card several months or weeks before applying for a mortgage might harm your credit because:
- The card issuer will do a hard inquiry, which basically means that he will check your credit report in order to determine how likely you’re to miss payments or default on your card. If you wish to get a new credit card or apply for any other type of loan, remember that hard inquiries will lower your credit score for just a few months following your application.
- A new card will reduce the average age of your accounts, which may also cause your credit score to dip initially.
Closing One or More Credit Cards before Applying for a Mortgage
Canceling a credit card before getting a mortgage is a big mistake, particularly if it has a high credit limit. In a nutshell, closing a credit card may have a negative impact on your credit score because it will reduce the amount of credit you have available, increase your credit utilization ratio, and decrease the average age of your accounts, especially if you’ve had the card for years. For instance, if you’ve used a card with a $1,500 limit for 10 years and one with a $3,500 limit for 3 years, and you close the first card, your only open credit card account would be 3 years old. On a side note, other accounts, such as auto loans and student loans, will also be factored in the average account age. If you still want to close one or more credit cards before applying for a mortgage, make sure you pay the balance in full first.
Using All or Most of Your Available Credit
The more credit you use, the higher your credit utilization and debt-to-income (DTI) ratios will be. This could become a significant obstacle to getting a mortgage. As a general rule, lenders don’t want to see more than 10% of your credit cards’ limits used. If you intend to apply for a conventional mortgage, FHA loan, or VA loan but have maxed out your credit cards, the smartest thing you can do is pay off your balance as quickly as possible. This will help you improve both your credit utilization and DTI ratios, which can make you a more attractive candidate for a mortgage.
Making Late Payments
Besides incurring late payment charges on your account, which could make it more difficult to pay down your balance, late payments will negatively impact your credit score and history. Because lenders will use your credit score and history to determine your creditworthiness, habitually paying your credit card or any other bills late could affect your mortgage application.
Only Paying the Minimum Balance
Making minimum monthly payments by the due date can help you avoid penalties and keep your account in good standing. However, only paying the minimum balance will increase the amount of time it takes to pay off your credit card balance as well as the amount you have to pay overall. That’s because you’ll be charged interest on the entire unpaid portion of your balance, which basically means that you’ll end up paying interest on your interest.
Whether you have already applied for a mortgage or intend to apply any time soon, don’t mess with your credit! Closing or opening credit cards, taking out other types of loans, making any big purchases, or doing anything else that could negatively affect your credit score may create uncertainty for the lender. This may work against you, reducing your chances of finalizing the underwriting process. For more information on how to boost your chances of being accepted for a mortgage, check out our blog section or get in touch with our professionals!
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