Homebuyer’s Credit Score: Keep Credit Cards Under 30% + more!

As anyone in the market for a new home knows, every dollar counts when preparing to apply for mortgage preapproval. Aspiring homeowners are aware that a good credit score makes it easier to buy a house with preferable loan terms and interest rates, translating into substantial long-term savings. The build-up to applying for a mortgage loan is often stressful, and buyers want to reach the highest limit possible. Their goal to get a high approval means that buyers should begin by keeping their credit card debt and credit score in an acceptable range. 

No buyer wants to be desperately researching the lowest credit score possible to be approved for a mortgage. Instead of waiting until the last minute, save thousands on preapproval by beginning to effectively manage credit limits early. Effective debt and credit management looks like keeping credit card balances at around 30% of available limits and avoiding paying off credit cards entirely or closing them completely. When buyers keep their credit cards and scores in line with these expectations, they show banks that they’re trustworthy and consistent with their spending, and therefore ready for a big purchase like a home.

Balancing Credit Utilization: The 30% Rule

Don’t let card debt get too high or too low! Start to help credit card debt and overall credit score by following the 30% rule. Maintaining credit card balances around 30% of the available limit is preferred by lenders. Make sure that this 30% is consistent for the months leading up to applying for mortgage preapproval. By keeping balances relatively low, buyers demonstrate that they can manage credit effectively without relying excessively on borrowed funds, showing that their income is enough to support their lifestyle. In the long term, this 30% rule also helps establish a positive credit history and indicates that buyers use available credit and pay it off responsibly. Check your credit score with some of the best sites here.

Some Debt is Good Debt!

Even though paying off balances might seem like a logical step, it isn’t always the best approach before seeking mortgage pre-approval. Be careful, because clearing all credit card debt can temporarily reduce a buyer’s credit score. Lenders evaluate creditworthiness based on several factors, including credit utilization and payment history. By paying off all debts, buyers eliminate credit utilization and have a high chance of disrupting credit history that lenders consider favorable. Again, aim to maintain a consistent balance at or below 30% of available credit.

Don’t Close Accounts

This one’s counterintuitive: Wondering how to maintain good credit? Don’t close any accounts! Closing credit card accounts probably seems like a sensible decision, especially if a buyer has a card with an inconsistent or unfavorable history, but beware: closing accounts has unintended consequences. When closing a credit card account, overall available credit limits are reduced, which results in a lower credit score

Higher utilization ratios negatively impact credit scores, decreasing a buyer’s chances of obtaining the best or most favorable loan terms. It’s important to keep credit card accounts open, even with a zero balance, as they contribute positively to credit history and overall creditworthiness. Don’t worry about spending money on the cards; simply keeping the account open with a balance of $0.00 is enough to positively impact a buyer’s credit score. Read more about credit card spending strategies here.

Credit Score: 20 Points is a Big Deal!

Yes - even a seemingly small difference in a credit score has a significant impact! Lenders analyze credit scores as the main indicator of a buyer's ability to manage debt responsibly. A mere 20-point difference in a buyer’s credit score can result in noticeable variations in interest rates and makes an excellent credit mortgage rate more feasible. Higher credit scores generally lead to lower interest rates, which translate into substantial savings over the life of the property’s mortgage. These long-term goals are why it's essential for buyers to monitor and maintain credit scores diligently to secure the best possible preapproval offers. Learn more about what different credit scores mean here.

Don’t wait to put these tips into practice. Even if a buyer is unhappy with their current credit score, just think: now is a great opportunity to begin to save, open a new account, or at least aim to keep debts around 30% during upcoming months. Because even just a 20% increase can make a noticeable difference in mortgage preapprovals!

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