How Your Credit Card Balances Affect Your Mortgage Application

Treating your revolving credit balances like free money will not only cost you more in interest fees on those balances but will cost you more on other loans you seek. Your credit score is affected by a host of factors other than delinquencies and missed payments, and outstanding balances are just one of those factors. Before you seek a mortgage loan, you should get your credit report in line to the best of your ability. Even if you have to wait another six months to a year, the extra time to straighten out your finances will save you tremendously over the life of your mortgage.

How Outstanding Balances Affect Your Credit Score

It is important to understand how the many factors of your financial health ultimately affect your credit score. Your FICO score, reported by three main credit bureaus, is a mathematical expression of all of the debt you hold or have ever held and how you have managed that debt. The report will show each of your lines of credit. Factors like late payments or defaults will drastically reduce your score. The report will also show how much of each credit line you are using. Experts recommend maintaining balances lower than 10% of your total available credit. Your credit score will also consider the many types of loans you are using, including revolving balances like credit cards and installment loans like autos or personal loans. Experts recommend having a fair mix of these credit types but not having too many cards or loans. Ultimately, if you have a few primary cards and each has a balance lower than 10%, you should see a healthy credit score. 

How your Credit Score Affects your Mortgage

The number one factor lenders consider when determining your mortgage interest rate is your credit rating. More than any other part of your application, this figure represents your total financial health. Your salary may be very high, but if you cannot show you use your credit responsibly, you will face high interest rates or be turned down for a loan. You should monitor your credit closely for at least two years before seeking a mortgage. Do not miss any payments, and assure all bankruptcies or defaults are at least five years outstanding. A credit score of 700 will be considered "good" on a mortgage application. Any less, and your interest rates will adjust up. If you can get your balances on all of your credit cards down, you will see your credit score improve.

How to Pay Down Balances

Paying down credit card balances may seem like an insurmountable task, but it is essential to your credit health. You will need to pay more than your monthly credit card payment. Start by finding your ability to pay each month. While saving is important, making credit card payments is more important to avoid getting assessed interest. Once you have determined how much you can pay each month, commit that payment to writing. Do not use your credit cards during this period of time. Once you have a low balance, you can begin using your credit again. However, remember to pay down your balance each month. Running up cards and carrying balances will always hurt you in the long run.