Should I pay off or close my credit card to get a better mortgage?
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO and consumer operations manager for Experian. He writes “Speaking of Credit,” a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared on Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
Should I pay off or close a credit card to get a better mortgage?
Paying off a credit card is one of the best things you can do to raise your score and qualify for a better mortgage, but closing a card is among the worst.
Dear Speaking of
Can you pay off your credit card to get a better mortgage? Or close the credit card to get a better mortgage? Which one is the best idea? – Marguerite
If by “better mortgage” you mean one with a lower APR, the best of your two ideas will soon be quite obvious when we consider some credit scoring details.
There are other factors besides credit scores that affect your ability to qualify for a mortgage: debt-to-income ratio, the amount of money you have in the bank and length of time at your job, to name a few. Yet, with these and other such elements firmly in place, you can make that mortgage more affordable simply by raising your score.
Mortgages and their score requirements
Before addressing some of the credit perks and pitfalls that can help give you more control over your mortgage application, some of the minimum credit score requirements for the various types of mortgages include:
- FHA. A minimum score of 500 can qualify with 10 percent down; a 580 score or above can lower the down payment to 3.5 percent.
- Conventional. While a 620 or higher score can meet the basic criteria, the best interest rates tend to be found by consumers with scores of 740 and above.
- Super prime. Some lenders provide even lower interest rates when scores reach 780 and above.
3 best ways to a better mortgage
No matter what type of mortgage your score is likely to qualify for, the following tips can quickly boost your credit score:
- Pay off or reduce revolving card balances. Doing so can lower the utilization percentages that influence 30 percent of your score. Additional points can be earned from related factors that measure how much you owe, such as “amount owed on accounts” and “number of accounts with balances.”
- Pay for recent charges before the next statement date. Paying according to this accelerated timetable can keep card balances reported to the credit bureaus as low as possible, which in turn keeps utilization percentages to a minimum.
- Activate any rarely used cards. Keeping a seasoned card active via occasional small purchases can keep the card issuer from closing the account due to inactivity. An open card with a $0 balance can help keep the score’s utilization low through its continued inclusion in all calculations that evaluate revolving debt. A closed card, on the other hand, no longer contributes to your utilization ratio.
Tip: A sudden spike in credit utilization can cause your score to plummet. Fortunately, points lost to high utilization can be recouped as soon as a high balance is brought back down and updated at the credit bureau.
3 worst ways to a better mortgage
While we’re at it, let’s also review some of the worst things you can do as you try to qualify for that better mortgage (thank you for providing No. 1 below):
- Close credit cards. While closing a card that still carries a balance won’t immediately hurt any of those all-important utilization percentages, closing a $0 balance card can raise the utilization percentage – and lower the score – by taking that card’s balance and credit limit out of the equation.
- Pay off a car loan early. Unlike credit cards, loan balances – whether mortgage, auto or student – carry very little of the weight we see assigned to credit card debt. As such, aggressively paying down a car loan in anticipation of a mortgage won’t provide nearly the bang for your (scoring) buck that paying down a similarly-sized credit card balance will.
- Apply for or accept a credit offer. In light of its extremely short track record and accompanying hard inquiry from the recent credit evaluation, a new account appearing on your credit report just prior to a mortgage application is likely to do more damage to your score than good.
Better score = better mortgage
By all means, you should pay off that credit card, or at least pay it down. But whatever you do, don’t close it. By following the best, and avoiding the worst, score-raising tips, you could soon be seeing a better score lead you to a better mortgage.
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