The market is hot and you are ready to purchase your next home. Interest rates are still at all-time lows, and now is the time to make your next move. But are you really ready?
Your next home purchase will likely hinge on your credit. If your credit score is low, you will get higher interest rates and potentially mortgage insurance tacked onto your payments. Too low, and you will be denied completely.
One of the more common credit killers is the proper use of credit cards. Your credit card company was kind enough to extend $500 of credit to you, but if you take advantage of the full amount of credit you have access to, your credit score will suffer.
The credit bureaus call it credit utilization. This is the percentage of credit you use versus the amount of credit you have available. If you have a $500 credit limit on your card, and you charge $250 at the mall, you have credit utilization of 50%. In other words, you have used half of your available credit.
Your credit score is partly based on your credit utilization. Optimally, the credit bureaus want to see you use under 50% of your available credit. Go over 50%, and your credit score will suffer. Additionally, the bureaus look at individual credit cards, as well as all of your cards totaled together. If you have an overall credit utilization of 35% on three cards, but one of those cards is at 85%, your score may be affected slightly, but keeping the overall utilization under 50%, your score will increase.
The rule of thumb should be keep your credit utilization under 40%, but not at a zero balance. While conventional thinking would say if you use none of the credit available to you, your score will be even better. But it isn’t true. Your credit score is based on responsible use of credit. You have to use credit to show responsible use, so when paying your credit cards each month, pay them down to $10, but not to zero. This small balance will keep your cards active and your credit score up.
As you start thinking about buying a new home, start out a couple of months in advance and address your credit score. A strong score will make the mortgage loan and home buying process easier.