You have been saving money, making your payments on time and thinking about buying a new home…you should be ready to go. You meet with your loan officer and find out that there are some issues you didn't know about. Credit card habits can affect your ability to qualify for a mortgage.
-Maxing out your credit cards. This can affect you in a few ways. One, it can affect how much you can qualify for due to the higher monthly payments required by the credit card company. Two, it makes an underwriter wonder if you are able to manage your finances. Three, it will lower your credit score. To avoid this problem, try to keep your credit card balances under 30% of the available credit for each credit card.
-Past due accounts. You are making your payments every month and all the sudden you realize that you forgot a credit card payment – it can happen by mistake, maybe you thought you paid it but you forgot. Maybe you were on vacation and forgot about the payment. If you have 2 or more late payments in the last 12 months, it can affect your credit score and some lenders may not approve mortgages with late payments on credit cards.
-Closing credit cards. This sounds like a great idea – you have paid down your credit card and want to make sure you don't use it again. So you close the account, thinking you are doing yourself a favor. This can easily affect your credit score because you just lost some of the available credit that you had. One part of your credit score is your credit utilization. The more available credit you have, the better. So instead of closing the account, keep it open – maybe destroy the credit card if you think you will use it again. If the account is one of your older credit cards, you definitely do not want to close it – that will also lower your score as it means you lose an account that has been reporting for a long time.
-Applying for more credit cards. Inquiries will lower your score – especially credit card inquiries – it looks like you are shopping for more debt. If you are getting a mortgage, you may apply at different companies and normally you are only buying one home. However, you can open multiple credit cards at one time, so those inquiries will hurt you. Also an underwriter may wonder if you are going to be able to afford that new home with more credit card debt.
-Being an authorized user. When you are an authorized user on a credit card, it means you are allowed to use that account. The person that is responsible for the payment can affect your credit report by not paying that account on time. That account will show on your credit report.
Be careful with credit cards, you can affect your ability to get a mortgage without realizing it. They are a great tool to have, but make sure you pay the accounts on time, keep the balances low and do not abuse the credit cards. That way it won't affect your ability to get a new mortgage when you are ready to buy or refinance your current home.