Getting a mortgage? Pay debts, go easy on charging

Borderline borrowers risk losing precious credit score points

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Dear Speaking of Credit,
I am in the middle of my mortgage process. I have been preapproved and have a closing date set. With that said, will using my credit card(s) at this point have a negative effect when I close in a few weeks? I know my credit score has dropped a few points since I started the application process for the home loan with the inquiries and I have used my credit card since starting the homebuying process. -- Dianna


Dear Dianna,
It's good that you're asking about the credit scoring impact of continuing to charge during the mortgage process. There can be some risks in doing so, which I'll show you how to avoid. I'm also glad you mentioned mortgage inquiries as a possible cause of your lowered scores, as it gives me the opportunity to clear up some common confusion about the role of inquiries in the mortgage process.

Let's first address the extreme importance of maintaining good credit scores at this critical time, not just when first submitting an application, but throughout the entire mortgage qualification and closing process.

By the end of the typical mortgage transaction, each borrower can expect to add about three inquiries to his or her credit reports at the three major national credit bureaus -- Equifax, Experian and TransUnion -- from scores pulled during the prequalification, application and closing stages of the process. The typical inquiry that affects your score -- which not all inquiries do, and I'll explain -- can be expected to drop your score by up to 5 points. If you're a borderline borrower, these are points you can't afford to lose.

Mortgage inquiries can impact your score through a complicated formula, but the underlying idea is fairly simple: The formula recognizes that people shop around for a mortgage from multiple lenders, so multiple inquiries from mortgage lenders that occur in a brief period are bundled.

Here's how it works: No mortgage-related inquiries have any effect on a score until 30 days have passed since the date of that inquiry. This is called the "30-day buffer" period. Using the "14-45-day inquiry deduplication" process, mortgage inquiries older than 30 days are counted as an additional inquiry only if they're dated more than 14 days after the inquiry preceding it for older FICO scoring formulas, and more than 45 days for the newer models.

Example No. 1: If your current credit report shows three mortgage inquiries -- 40 days old, 25 days old, 5 days old -- only that 40-day old inquiry would impact a new score calculated today. Those second and third inquiries still fall within the 30-day buffer period. 

Example No. 2: Once a few months have passed since incurring those three inquiries in Example No. 1, none remain within the buffer period. So, seeing as how there are more than 14, but less than 45 days between each inquiry, the older (14-day deduplication) FICO models will count all three inquiries, while the newer (45-day deduplication) models will count only one.

In your particular situation, not knowing the dates of your inquiries or the models used to calculate your scores, it's safe to say that by closing time, at least one -- but not every -- inquiry will have had some negative impact.

And like it or not, there's really nothing you can do about inquiries resulting from the mortgage application process, since the lender gets to call all of those shots. Yet there is something you can do about the other important concern you've raised -- charging.

To avoid damaging your scores any further while the loan is being processed, you'll want to make sure the charges you've already made and will continue to make before closing don't raise your credit utilization (total and individual card balance/limit ratios), which makes up almost a third of your score. Any such increases could lower your scores and jeopardize the approval of your loan when that last set of scores are pulled prior to closing. 

To avoid such a catastrophe, you can either stop charging entirely or continue to charge during next few weeks, but pay off any new charges before both the next card statement and loan closing dates. By doing so you'll ensure that as low a balance as possible appears on your credit report for that card, and contributes to low credit utilization percentages when the next scores are calculated.

One step better -- especially if your scores lie dangerously close to the lower end of the score requirements -- pay as much as you can on your card to reduce your utilization by as much and as soon as possible. In addition to neutralizing any effects from charging, this extra measure could help compensate for any inquiry-generated point losses you won't be able to control. But, as an important warning, only do so without touching your savings account balance, as, in addition to wanting to see your scores remain stable, the lender will also want to see that your savings account balance has not dropped any.

Good luck!

See related: 5 steps to a mortgage-worthy credit profile, How rapid rescore works when applying for a mortgage, Why hard inquiries hurt your credit score

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Updated: 01-21-2018