house or credit card usage


Perhaps you're preparing to buy a home. You know that your credit score is a major deciding factor in whether you will be approved, as well as what rate and terms you will be offered. The better your credit score, the better interest rate and terms the mortgage company will offer.

You have been paying all your bills on time, and trying to do everything right . . . but your credit score suddenly dropped. What happened?

Paying your bills on time is a major factor in your score, but there are some less obvious reasons your credit score may have dropped.

Are you using more credit? FICO scores take into account the amount of credit you are using in relation to the amount of credit you have available. For example, let's say you have two credit cards, each with a $1,000 credit limit. This gives you $2,000 in available credit. If you charged $500 on each, you would have $1,000 in balances for a 50 percent credit utilization ratio. A higher ratio generally equates to a lower score. Your credit score can drop significantly as the ratio increases.

So what is considered a good credit utilization ratio? Less than 30 percent. So in our example above, you should keep each card balance under $300.

Have you applied for new credit? Every time you submit a credit application, whether for a major credit card, a store card, or in-store financing, an inquiry is posted to your credit report. FICO scores take into account the number of inquiries received. More inquiries often equate to a lower score—unless you've been shopping for a home or auto loan. The FICO algorithm will not penalize you for multiple mortgage or auto inquiries made within 30 days.

While preparing to qualify for a home purchase, avoid opening any new accounts. Resist the temptation to save 10% on your purchase today when you accept a new store credit card, even if you don't plan to use it. Don't accept a 90 days same as cash offer, or payment over time for dental work, etc. All of those things will create inquiries on your credit report.

While neither of these scenarios necessarily mean you're a higher lending risk, lenders tend to view them as a sign of poor credit use.

Try to pay down balances on your credit cards, and avoid opening any new accounts. When you pay down your balances you should see your score improve fairly quickly as a result.

When you're preparing to buy a home and qualify for a mortgage, it helps to keep it top of mind and make it a priority. This will help you resist the temptation to buy things you don't absolutely need. After you close on your new home, perhaps then you can reward yourself with those extra purchases.

If you have questions about qualifying for a mortgage or about purchasing a home in the Chicagoland area, give us a call or use our Contact Form and we will get back to you.