Two Credit Blunders to Avoid When Buying a Home
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The Goal of Homeownership and Credit Cards
The best part of my job is helping members achieve their goal of homeownership. When I sit across from a member, I see me answering a lot of questions about credit such as, 'What affects my credit?' and 'How do I increase my score?'.
Credit cards and credit scores seem to be one of the great mysteries of life; right up there with, 'When does it stop being partly cloudy, and start being partly sunny?' or, 'Which arm rest is yours at the movie theater?'
If you’re considering buying a house soon, there are two major credit card "blunders" to avoid:
Closing Your Credit Card Accounts
When I have the opportunity to speak with a first-time homebuyer, one statement I commonly hear is, “I just closed a few credit cards.”
My answer? Don’t do it!
Credit bureaus look at your capacity to borrow and the percentage of debt you carry compared to your potential to borrow. The lower your percentage, the higher your credit score.
For example: You have five credit cards and your total credit limit is $50,000. If you only owe $5,000, your total percentage of debt usage is 10%. Not too bad, seeing as you’re generally not to exceed 30% of your available credit! However, if you close all cards except one with a $5,000 limit (or, the amount of debt you currently have), your debt usage is 100%. Your credit score will be dramatically affected.
Running Up Credit After Becoming Preapproved
Once you’re preapproved or approved for a mortgage, try to resist the temptation to run up your line of credit. Throughout the early stages of the loan process, your lender will pull your credit report to get snapshot of your financial situation. However, be wary that your lender may run another check before closing, and if you’ve increased your debt usage, you might miss out on your dream home.
This is quite common as many potential homebuyers gain approval and find their dream home. Couples finance new furniture and decorations, increasing their debt usage and making them ineligible to close their loan.
Best Advice?
Pay off your credit cards, keep them open, AND have the discipline to keep your balances low.
Ready to begin the homeownership process or questions about homebuying? Register for our upcoming homebuying seminars or contact one of our mortgage loan officers at realestate@abecu.org or call 1-877-269-4179.
