5 credit don'ts for homebuyers applying for mortgages
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Dear Speaking of Credit,
I am buying a house in five months. I also want to apply for a furniture store credit card, which they are offering with no payments until 2016. My question is, how long do I have to apply for this credit card so that it won't affect my credit when closing on my new home? -- Al
I commend you for asking this question now and not after the fact, as happens all too often when buyers get caught up in the excitement of a new home purchase. Your question indicates that you already understand the importance of treading very softly when it comes to making any changes to your financial picture at this time -- whether opening new credit, making large bank account deposits or withdrawals, or even, as I will explain, disputing credit reporting errors.
Fortunately, it's simple to know where to tread -- and how softly. When in the process of seeking mortgage approval and at the same finding yourself faced with opportunities to open new credit accounts and charge major purchases to existing cards, first ask yourself if this new account or balance will appear on your credit report. If the answer is yes, then simply don't do it.
To illustrate, I'm going to list five "don'ts" to follow that can keep you from jeopardizing your mortgage during the all-critical mortgage loan approval process:
1. Don't be late. The surest way to torpedo a mortgage application is to miss a payment, or worse, add a collection or judgment to your credit report. A 30-day late payment can arise from a missed payment of any amount on a credit card, mortgage, auto loan or student loan, and can lower your score by more than 100 points. Collections and court judgments, which often find their way to credit reports seemingly from out of nowhere, can drop your score just as significantly when unpaid medical charges, utility bills, parking tickets, and even library fines go uncollected. If you have reason to believe such a debt might be lurking in the shadows of your credit file, pay or somehow resolve it immediately.
2. Don't add to any existing credit card balances. Credit card utilization (balance/credit-limit percentage) is second only to payment history in impacting your credit score. They comprise 30 percent and 35 percent of your score calculation, respectively. Maxing out just one low-limit credit card can cause your FICO score to drop by as much as 45 points and disqualify your mortgage application.
3. Don't apply for any new credit accounts. Here's where your question about the furniture store card gets answered. The day after you close on the house, feel free to apply for this and any other card that can save you money on the many purchases you're likely to be making as a new homeowner. But until then, don't allow any creditor to so much as check your credit, let alone open a new account in your name. While it's a little harder to estimate the number of points you can lose due to newly opened accounts and inquiries versus missed payments and maxed-out cards, a FICO study shows that, on average, people with the best credit scores (upper 700s) have not opened a new account in more than two years.
4. Don't close unused accounts. What's important to remember about closing cards is that doing so will not raise your credit score, only, in some cases, lower it. A score can fall when closing a card reduces the combined available credit amount to the point where the credit utilization percentage increases for the remaining open cards. As with opening new accounts, if you want to close a card, wait until you're in your new home.
5. Don't dispute anything on your credit report. Unlike the first four "don'ts," the problem with disputing credit reporting errors isn't that it lowers your credit score. Rather, under current mortgage lending rules, all it takes is one disputed account under investigation by the credit bureau -- for whatever reason or amount -- to delay or, in some cases, kill the loan. The rule is the result of lenders getting wise to consumers who in the past have tried to raise their credit scores by disputing negative, though accurate, information.
Now armed with this set of actions not to take until after closing, I hope your mortgage approval process goes through without a hitch and that you enjoy being in your new home!
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