Credit Sesame explains why a new credit card can make it harder to get a mortgage
Applying for too much credit at once can cause creditors to think you’re desperate for money and are facing some cashflow problems.
Manage a new credit card well and it should raise your credit score. Pay the bill on time and in full each month, don’t use more than 30% of the available credit on the card, and adding to your credit mix are big steps that account for about 75% of a FICO credit score.
However, getting a new credit card, even if you are pre-approved, right before getting a mortgage is a bad idea. It can ding your credit and make it harder to get a mortgage. In the worst case, mortgage lenders may deny your mortgage application. Or they could offer you a home loan with a higher interest rate to help compensate for being a bigger risk with too many credit applications at the same time.
How a new credit card can hurt a mortgage application
Think hard before getting a new credit card if you plan to submit a mortgage application soon. Here’s how a new credit card may hurt your mortgage application.
Good payment history can fall in the short-term
Normally, paying your bills on time accounts raises a credit score. Payment history accounts for 35% of a credit score, so on-time payments are a big factor. Creditors want to see a steady, long history of making payments, especially home loan lenders, because you could be making mortgage payments for 30 years.
A new credit card account, however, doesn’t have a payment history to report. That can lower a score for a few months until your on-time monthly payments on the card are reported to the credit agencies. Then your payment history improves.
New credit means hard inquiries
New credit makes up 10% of a credit score. Too many accounts or inquiries are seen as a higher risk and can cause your credit score to drop for awhile.
Applying for a credit card usually requires a hard inquiry by the credit card provider. It looks at your credit reports to see what your credit score is, and decides if it will approve the new account.
Hard inquiries knock a few points off a score and stay on a credit report for two years. Their effect usually diminishes after a few months. But when applying for a mortgage, you may not have a few months to wait to get the home you want.
Average age of accounts drops
The length of your credit history and average age of your accounts makes up 15% of a FICO credit score. Adding a credit card lowers the average age of your accounts, which can cause a score to fall.
What could happen to your mortgage application
If you have a high credit score and are applying for a home loan, your score hopefully won’t fall much if you’ve had a recent credit card approved. You may still get the same mortgage rate because your credit score is still in the high range needed to qualify for the best interest rates.
But you could be on the cusp of good score, and your score could drop just enough to put your home loan into a slightly higher interest rate. Over a 30-year fixed-rate mortgage, a small rate increase can cost you thousands of dollars in interest.
Or you could go from good to fair credit, and may no longer qualify for the loan.
How to avoid mortgage application problems
A few things can cause credit scores to drop during a mortgage loan review. Lenders are looking for stability, and some changes may be out of your control. A new job or sudden move during the application process can be signals that your finances are changing.
New credit card accounts, or even just one new credit card, can be enough to drop a credit score and can be a sign that you’re having money problems. Even if you don’t have any debts and plan on using the new card wisely, your score could still drop for a few months.
The best thing to do is to not apply for new credit when you’re trying to get approved for a mortgage. The same goes for other types of loans, such as a car loan, even if you need a new car around the same time as you’re applying for a home loan.
A mortgage is likely going to be the biggest purchase loan of your life, and you don’t want to risk losing it because you’re applying for another type of credit at the same time.
It also helps to get your credit reports in as good of shape as they can be in before applying for a mortgage loan. Check your credit reports and fix any errors, pay your bills on time, and pay down as much debt as you can.
Get new credit after your home loan is approved
If you can raise your credit score and put off other loan applications, then hopefully your home loan is more likely to be approved because your credit score is great. Other requirements should also be met, including:
- Solid employment history
- Good down payment of 20%
- Pre-qualification for a home loan
- Ample savings
After your mortgage loan is approved, then you can start applying for a new credit card or car loan. You’ll have a new house to fill with furniture, and a new credit card may be useful.
Bottom line
Waiting for something you want can be hard. A home is one of the biggest purchases of a lifetime, and it would be a shame to pay a higher interest rate or fail to get the loan approved because you applied for a new credit card. at the same time. The easiest fix is to put off the credit card application until you’ve bought the home.
You may also be interested in:
- Guide to Buying a House and Getting a Mortgage
- Timing is Everything: When is the Right Time to Apply for a Mortgage?
Disclaimer: This guide to buying a house and getting a mortgage is for informational purposes only and is not intended as a substitute for professional advice.
