Blog posted On July 25, 2018
Lenders use the credit score to evaluate a potential borrower’s ability to repay the loan. Your credit score is integral to your ability to qualify for a mortgage. It can take years to build up your credit score and just a few mistakes to damage it. One pervasive credit card myth many consumers believe could actually be hurting your credit score. According to a report by CreditCards.com, over 43 million Americans, 22% of all consumers, have carried a balance on their credit card under the impression it will improve their credit score. Unfortunately, that is not the case.
Your credit score is comprised of five major components, each weighted differently: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%). Payment history refers to consistent, on-time payments, amounts owed counts total outstanding debt, credit history means age of open accounts, credit mix means various types of credit, and new credit counts any recently opened accounts. Carrying a credit card balance hurts both payment history and amounts owed, two of the heaviest hitting credit score influencers. Every payment you do not make on time toward the balance hurts your payment history and the larger the balance goes the more it impacts total outstanding credit.
Carrying a balance will also lead to more interest payments. The longer you carry a balance the more you pay in credit card interest. According to Experian, the average American has a credit card balance of $6,375 and the national average annual percentage rate (APR) topped 16% for most major credit card companies in 2017. Each month you carry a balance, you are piling on more credit card interest and hurting your chances of securing additional lines of credit at lower interest rates.
Maintaining a healthy credit score is imperative to securing lines of credit, like a mortgage loan. Lenders will usually review the potential borrower’s credit score during prequalification. The FICO credit score is the most widely accepted credit score. Free online scores are a good way to monitor credit but may not match up exactly with the actual FICO score. CreditCards.com senior industry analyst Mike Schulz told CNBC, ““It’s about keeping your balance low, paying bills on time and not applying for too many lines of credit.
If you have any questions about how to rebuild your credit before you apply for a mortgage, consult a trusted mortgage professional.