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Home Purchases
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CREDIT CARD DEBT & MORTGAGES
If you are considering
applying for a mortgage, you may want to consider
eliminating credit card debt. Not having a balance
on your credit cards will increase your changes of
getting a good rate on your home loan.
Dear Star Loan Services,
My husband and I are currently utilizing one credit
card with 0% interest for paying our day-to-day
purchases, to avoid having to constantly balance our
checkbook. Before using a credit card in this manner, we
would only charge around $300-500/month on our other
cards, and pay the balance in full every month.
Now, we typically charge around $3000/month to it. We
make one payment each month from our
checking account. We are running a $1,500 to $2,000
balance and can pay the card in full at any time without
difficulty.
We are in the market to
buy a new home and are speculating whether we should
pay off the balance prior to communicating with a
lender. Being that we use this card on a regular basis,
does it appear as though we always have an outstanding
balance based on its payment history? Is it possible for
this to effect us negatively?
Would it be a good idea to begin using only a checking
account instead, and have a zero balance on the card?
Regards,
Wendy Strahls
Dear Wendy,
When people write in with this question, they’ve got
a decent sized balance in their checking account, but
are paying anywhere from 4 to 30 percent interest on
their
credit card debt.
It is obvious that you have good credit. You have been
offered a
credit card with zero percent interest on it, so you
are paying for your purchases over time and carrying a
small balance on the account. Also, you have money in
your checking account that is likely earning some
interest every month.
Earning the interest sort-of puts you ahead financially,
but carrying a balance can damage your
credit score and history. It is very common for
credit card companies to report your balance as if your
limit has been maxed out.
A good idea would be to obtain a
3-in-1 credit report to see how the bureaus are
reporting your credit card activity and balances.
Lenders are familiar with seeing credit card balances,
and they will adjust for them. Lenders will add up
how much you can afford to spend each month on your
mortgage, including interest and taxes. Conventional
loan lenders allow you to spend up to 30% percent of
your gross monthly income on these three items and up to
36%on your total debt.
If you are carrying a balance on your credit card, the
lender will subtract your minimum monthly payments from
the sum of the debt that you carry. The end result will
be you qualifying for a smaller mortgage loan.
In your situation, the lender will probably see that you
have enough money to pay your debt off, but 'dock' you
for the way you
manage your finances.
It seems as though you are only talking about a thousand
dollars or so. If this is the case, you should pay off
your credit card debt and keep the slate clean.
No matter what the situation is, paying off your debts
in full will result in a higher credit score. Carrying
any sort of balance, even at zero percent, will only
hurt you.
Related Info:
Importance of Paying Credit Card Balances in Full
Your Credit and Mortgages
Making Late Payments
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