Credit cards and your mortgage application
Contrary to popular belief, the way that an individual uses his or her credit cards can make all of the difference in how a lending institution looks at your ability to pay back a mortgage. Although you may think that a retail credit card does not have anything to do with a house payment, to a bank, the overuse of credit in any capacity all looks the same. All of the things that you purchase on credit are a part of your credit history, and a bank has the prerogative to look at your entire credit history when they are determining your creditworthiness for what will likely be an investment over the next few decades.
What exactly does the bank look at when determining my creditworthiness?
In order to determine the creditworthiness of a borrower, a lending institution will check the credit card behavior of an applicant as well as the percentage of credit used to credit available as well as the number of credit accounts, the length of time that lines of credit have been opened and the timeliness with which a borrower pays back credit lines.
Unsecured credit, or credit cards, are especially important to a lending institution as a behavioral indicator. Banks consider your behavior with these credit lines to be the most important even though the mortgage is a secured loan. They want to know how you will behave when you are given the most free will over your credit lines. Therefore, if you have to pay back loans in order to raise your credit score, pay back your unsecured credit cards first.
Even if you have not used your credit cards in a way that will completely forego the bank’s ability to give you a loan, you may actually receive a loan with a higher interest rate than you should if your credit score is not in order.
The three major credit rating agencies
Experian, Equifax Plc and Call Credit Plc are the three major credit rating agencies that determine how banks view your credit history. These three agencies hold a great deal of information on you including personal information, legal judgments against you as well as important financial events in your life such as bankruptcies.
The three credit agencies all calculate your credit score differently, so different scores are to be expected. However, they are also well known for making mistakes. If your credit score is off by a significant amount in one or more of your reports, then you should look into the reports for mistakes. One of your credit accounts may have been charged based upon having a similar name or government identification number to another person. Banks cannot see if the listings on your credit report are mistakes or not, so you have to fix these mistakes before you go into the bank seeking a loan in order to receive the best deal on a mortgage.
How to increase the credit score
If you need to increase your credit score before you go into a bank for a loan, here are a few things that you can do.
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Pay back your loans one by one
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Close extraneous accounts
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Put yourself on a repayment schedule
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Do not let a lot of banks check your credit over and over
Obviously, paying back outstanding loans will increase your credit score, albeit slowly. As stated before, if you have multiple accounts to pay back, pay back unsecured credit accounts first. Get rid of the ones with the largest interest rates if you can because they are the ones that add the most real money to your debt.
Closing some of your credit accounts may increase your credit score. If you are going to close accounts, make sure to close the accounts that have been opened the most recently. Older accounts should remain open whether they are paid off or not in order to show that you have a long credit history. However, you must watch how many accounts you actually close. Closing too many accounts can actually decrease your credit score because the ratio of your used credit to the credit that you have may decrease.
Once you catch up on your credit payments, you can increase your credit score drastically by paying off your minimum payment on all accounts every month. If you can, pay off each and every credit account in full every month.
If other people check your credit, it reduces your credit score. See if you can request a certified copy of your own credit reports and bring them into sessions with bank officers so that you do not have to pay for their inquiry with their fees as well as your credit score.
