Credit Smart

Keep credit utilization low when refinancing mortgage


Even if you don’t carry a balance, high card use can hurt

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Dear Credit Smart,
We pay off our credit card every month. Does the substantial unused amount of credit on the credit cards count as debt in a refinancing? – Joe


Dear Joe,
No, unused credit is not considered debt. It is considered available credit. There was a time when mortgage lenders did view available credit as a risk when making lending decisions. Back then, the thought was that if a consumer had access to large amounts of credit, they could access it all after their loan was approved. Doing so might lead the consumer into becoming overextended and at risk for default. That old, “you have too much credit” argument has largely gone by the wayside and, in today’s lending environment, having more credit available is actually better for one’s overall credit score.

In part because of this shift in thinking, many consumers use their credit cards for nearly all of their monthly purchases. Another reason is to take advantage of the rewards offered by the credit card companies for dollars spent using their cards. This can be a smart strategy if the consumer does indeed pay the account balances in full every month, as you are doing, thereby avoiding interest charges.

I would caution you, however, to refrain from charging up to or close to your limits each month if you are considering applying for a mortgage refinance in the near future. According to “Your credit report is a snapshot of your credit history at the moment in time that it is accessed.”

Even though you are paying off your balances in full every month, what will matter to your lender is what your lender will see on your credit report. While creditors do report monthly activity to the credit bureaus, not every creditor reports on the same day to every bureau at the same time.

What this means for anyone who regularly charges up to or close to their credit limit is that their credit reports could be pulled after charges have been posted but before the payment for the month is made. This will result in a credit utilization ratio that is higher and will affect the overall score in a negative way if it is close to or at the credit limit.

One option you can try in order to avoid this scenario is to call each card issuer and ask when they report to the credit bureaus. I can’t guarantee you’ll get a clear answer from each one, but it’s worth a shot. Then make your payment a couple of days before the card’s reporting date.

Otherwise, you can certainly continue to use your cards during this process as long as you can stay well below your limit. Of course, I would also recommend that you continue to pay off the cards every month. You may miss out on some rewards in the short term, but qualifying for the best possible interest rate on your refinance will be well worth the wait in the long run.

As an alternative, if you would like to keep your utilization ratio low and still keep charging, make multiple payments on your credit card every month. That will greatly increase the odds that when the credit reporting snapshot is taken, your credit utilization ratio will be low.

Remember to always use your credit smarts!


See related:How credit utilization works in credit scoring

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