Credit cards are a double-edged sword. Depending on the scope of your credit, obtaining and using credit cards may actually improve your credit score. On the other hand, they have the potential detriment of your ability to qualify for a mortgage. Lenders will look for credit lines when you apply for a mortgage.
Here are the reasons why:
- A credit card payment eventually becomes an obligation or rather a liability.
- When a mortgage lender qualifies you for a loan, they take 45 percent of your gross monthly income less any current and present liabilities.
- These present liabilities include credit cards as well as any other payment obligations. The net result is your new total mortgage payment that you could qualify for.
- Credit cards help your credit score because if you used your credit card well it can be used to show a satisfactory payment history, which supports having a healthy high credit score. An example of a healthy and high credit score is a score over 700.
- If you look at it from a different perspective, paying credit card balances on time improves your credit score. At the same time, paying your credit card balance reduces your ability to borrow, if there are any balances which carry payments.
How to time it right:
The idea is you want to use credit cards to essentially finance a higher credit score.
How does it cost you? Paying interest on a credit obligation over time essentially finances your good credit score, which you will need when it comes time to apply for a mortgage.
The key is to pay off the credit cards down to 30 percent of the total allowable credit line. The best thing you can do is to pay them off in full.
When each credit card is paid off in full or paid down to the appropriate balance (remember 30 percent is a good goal), find out from each creditor when they specifically report to each of the three credit reporting bureaus — Transunion, Equifax and Experian.
The key here is to find out specifically from each creditor when they report to the bureaus. The goal is to have each creditor report the most recent balance to the bureau.
It is ideal to do this when the mortgage lender pulls your credit report. At this time it shows the highest possible credit score and you will get the best deal on rates and mortgage loan terms.
The bottom line is credit cards are great for building a credit score and maintaining solid history of obligation repayment. Lenders will also be looking for at least two to three credit lines when you go to apply for a mortgage, so be sure to have open credit cards. These other open credit cards can have no balances or balances of 30 percent of the total allowable credit line or under.
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