If you are a first time home buyer in Montgomery County Pennsylvania you should know that your credit score will have a significant impact on your ability to qualify for a loan – especially for FHA mortgages. Although most buyers are aware of this fact, many are unaware that some of the actions they take when trying to improve their credit often end up with having opposite result.
In this series of articles I will try to dispel some of the credit myths that exist and why you should know the facts.
One of the more common questions I receive from borrowers is whether they should consolidate a few of their credit cards onto one, lower rate card. Although one would benefit from the interest rate savings the result of this action will typically end up lowering their credit score – not a good thing when you are looking to buy a home in the short term.
Fact: One of the factors in determining your credit score is known as credit utilization. Your credit score is a predictor of your future credit behavior based on your current and past credit use. If you have 3 credit cards, each with a limit of $10,000 and a balance of $3,000 you register with the credit bureaus as being a ‘responsible’ user of credit for those cards. You aren’t using too much of your available lines yet you are maintaining a reasonable balance at 30% of the limit.
Now let’s say you take those three cards and consolidate them onto one card. You still have the $10,000 limit, however, now you have a balance of $9,000 which is a 90% utilization of your available credit limit. Couple that with the recency of such a change and your score will drop because the credit bureaus scoring mechanism will categorize this as a higher risk.
You can see this illustrated in the example below:
Credit Card Consolidation Can Hurt Your Score
The best advice that I can give someone who is looking to buy a home soon is to wait to consolidate those balances until after closing. This way you can realize the benefits of the lower rates and save money but avoid the risk lowering of your credit score at a time when it is most important – when you are looking to buy a home!
As always, if you have questions about this, or any other home buying questions please feel free to contact me.
Thanks and we’ll see you around town!
Jason Klaskin
215-513-1332
jklaskin (at) in-mortgage.com
www.in-mortgage.com
