To increase your mortgage chances, you’ll want to appear as the most attractive borrower. In other words, appear as someone who’s likely to repay a debt on time. Sure, a high income can do this. However, equally as important is your credit score.
Your credit score is a three-digit numerical representation of your credit history. Unfortunately, your credit card debt is a consideration in credit score calculations. Meaning, any outstanding credit card debt may affect your credit score. And, by extension, your mortgage chances.
In this article, we’ll be taking a look at how your outstanding credit card debt affects your mortgage chances.
Credit utilization refers to the percentage of the available credit you’re using at a given time. In other words, it’s how much outstanding debt you have relative to your spending limit. To explain, on a credit card with a $1,000 limit and a balance of $500, your credit utilization is 50%.
Credit utilization is one of the major credit-scoring factors. In fact, it alone accounts for 30% of it. Generally, you’ll want to keep your credit utilization under 30% at all times. This is considering that your credit score will start to decline as you approach this mark.
How A High Credit Utilization Affects Your Mortgage Chances
Before a lender can give you a mortgage, they’ll first need to determine your creditworthiness as a borrower. Or, the likelihood you’ll repay a debt on time. This is where the process of underwriting begins.
During the underwriting process, lenders will look at your income, assets, and, of course, your credit score. A low credit score suggests that you’re likely to default on your loan. On the other hand, a higher credit score indicates that you’ll likely pay off your mortgage as agreed.
That being said, a high credit utilization ratio can also affect your debt-to-income (DTI) ratio- another factor lenders consider. DTI refers to how much of your income goes towards your debt payments. And if this number is high, it may lower your mortgage chances.
Should You Cancel Your Credit Card For A Mortgage?
You typically don’t want to cancel a credit card when applying for a mortgage. While this may seem like a good way to stop yourself from racking up more credit card debt, it can have a negative effect on your credit score.
Canceling a credit card can increase your total credit utilization. For instance, let’s assume you have two credit cards, each with a $1,000 spending limit. If both cards have a $500 balance, your total credit utilization is 50%. If you pay off one of the cards, your total credit utilization becomes 25%. However, canceling the credit card you just paid off will bring your credit utilization back to 50%.
Closing a credit card account may also reduce the average age of your credit. And this can also have a negative impact on your credit score, as well as mortgage chances. The length of your credit history is also a credit-scoring factor. And the more seasoned your accounts get, the better your credit score.
The Bottom Line
Yes, your outstanding credit card debt will affect your mortgage chances. This is because how you use your credit cards directly influences your credit score. And the lower your credit score, the less likely you’ll convince a lender to grant you a mortgage.