Sally Herigstad is a certified public accountant and the author of “Help! I Can’t Pay My Bills: Surviving a Financial Crisis.” She writes “To Her Credit,” a weekly reader Q&A column about issues involving women and credit, for CreditCards.com. She also has written for MSN Money and Bankrate.com, and has guested on Martha Stewart Radio and other programs.
My credit card issuer increased my card’s credit limit without my approval. Will this hurt my chances of being approved for a mortgage loan?
No, it shouldn’t. In fact, if you carry a balance, an increased credit line will actually help your credit scores by reducing your credit utilization ratio.
Dear To Her Credit,
If I’m applying for a home mortgage, and my credit card company increased my credit limit without me knowing, can that ruin me getting approved for a mortgage loan? – Anika
Absolutely not! A credit limit increase will most likely help your credit score, assuming you don’t go on a spending spree with it.
You’re not alone in thinking that a credit limit increase can hurt your score and make it harder to get a mortgage. Years ago, the common wisdom was that the more credit you had available, the riskier the borrower.
However, the major credit scoring models don’t see it that way anymore. In fact, the effect is almost the opposite. Current scoring models give you a higher score for using a small (or zero) percentage of your available credit, and the more credit you have available across both individual cards and all your cards together, the smaller your credit utilization ratio.
For example, say you have a $1,000 balance on your credit card, which is your only source of credit. If your credit limit is $1,500, your credit utilization ratio is 67 percent ($1,000 divided by 1,500). In other words, you’re using 67 percent of your available credit. That’s too high.
Let’s say the bank raises your credit limit in the above example to $5,000. Now, your credit utilization ratio is 20 percent, which should result in a higher credit score ($1,000 divided by 5,000 = 20 percent). If you have multiple credit cards, add up all your credit limits and balances to come up with your overall credit utilization ratio.
Tip: When you’re getting ready to buy a home, avoid making any big changes to your financial profile. For example, don’t increase your debt or apply for new loans or credit cards, don’t decrease your savings and don’t change your employment situation.
Prepping your credit scores for a mortgage loan
While you’re getting ready to apply for a loan and buy a house, remember these tips:
- Keep your credit card balances as low as possible all month, every month.
You don’t know when the banks will send information to the credit bureaus. If they report the day before you pay your bill, that’s the balance they will show – even if you pay it all off by the due date. When your credit score matters, try making more multiple payments per month.
- Don’t make any big purchases, if you can help it.
This is not the time to buy a car, new furniture or anything else that can deplete your cash reserves or add to your debt load. Don’t think it’s OK to start spending when your loan is approved, either. Wait at least until the real estate deal closes before you make any big financial changes or expenditures.
- Watch your credit report closely.
Fix any errors immediately.
- Boost your credit score.
If your score isn’t in the “excellent” range, take other steps to improve it as quickly as possible. For example, consider paying down credit card balances, if you can do so without depleting your available cash and emergency fund.
- Make sure you are ready to seek a mortgage.
Be prepared to put off buying a house for a few months, if necessary, to get your credit score up to par first. Rushing into a home loan with so-so credit can be very expensive. You’ll probably get a loan, but you’ll pay higher interest on the loan. Over the years, that additional interest expense can add up to a lot of money!
You might be surprised how much your credit score improves just because your credit card company increased your limit. According to FICO, the amounts you owe on accounts determines 30 percent of your FICO score. Good luck to you as you go house shopping.