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Opening a new credit card account when you're trying to get a mortgage can complicate your loan application. A new account may cause your credit score to dip temporarily and may raise questions about the stability of your finances. If you're considering a new card and a new home at the same time, hit the pause button and read on.
How Applying for a Credit Card Affects Your Credit
Ultimately, getting a new credit card account and managing it well is a prime opportunity to build good credit. But applying for and opening a new account can cause minor ups and downs with your credit score, which are important considerations if you're also getting ready to apply for a mortgage.
- A new credit application can ding your credit score. When you apply for credit, the card company reviews your credit score and report, resulting in what's called a hard inquiry. Hard inquiries can knock a few points off your score and will stay on your credit report for two years. The effect of hard inquiries typically diminishes after a few months.
- New credit activity can lower your score. Credit scoring company FICO looks at how many recent inquiries appear on your credit report as well as how recently you've opened new accounts. Applying for or opening a flurry of new accounts can come across as risky behavior, and this could affect your score. Recent credit activity accounts for 10% of your score.
- A new account lowers your average age of accounts. The length of your credit history and the average age of your accounts make up 15% of your credit score.
- More available credit can improve your credit utilization. Credit utilization is the amount of revolving credit you're using divided by your total available credit. Here's a quick example: Say you have $2,000 in revolving debt (typically credit card balances) and $8,000 in available credit. In this case, your credit utilization is 25%. If you add a new card with a $5,000 limit and a zero balance, your credit utilization drops to around 15%—good news, since amounts owed on your accounts make up 30% of your FICO® Score☉ . But beware: If you max out your new card to buy $5,000 worth of furniture, credit scoring models will consider the utilization on that single card (100%) and across all your cards (53%)—in both cases, that's high enough to damage your credit score and possibly raise a red flag with your lender. In general, it's best to keep your credit utilization under 30% at all times, and the lower, the better.
- You may add to your credit mix. If your new account adds diversity to your credit portfolio, your credit score may improve. Credit mix speaks to how many different types of credit you manage, such as revolving credit cards and installment loans, and it accounts for roughly 10% of your credit score.
- Good payment history helps your score, eventually. Payment history accounts for 35% of your FICO® Score, which makes it the most influential factor. But a new credit account doesn't have a payment history to report. For that reason, a new account may even lower your score temporarily. Making your monthly payments on time will raise your score eventually, but this can take a few billing cycles or longer.
A New Credit Card May Hurt Your Mortgage Application
Overall, opening a new credit card account and managing it wisely is good—not bad—for your credit. But getting a new card just before or during the mortgage application process isn't the best timing. Why? For one thing, a temporary drop is typical when you open a new account, and you can't accurately predict how your score will change. If it drops enough to move you from "good" to "fair" credit, for example, you may no longer qualify for your loan. A lower credit score may also cause your lender to bump up your interest rate. Even a small increase in the rate you pay can cost tens of thousands of dollars over the life of a mortgage.
Making a significant change to your credit profile also adds an element of instability to your application. A mortgage is a large loan with a long lifespan. Lenders are looking for evidence that you'll pay your loan predictably, month after month. A good credit score and clean credit report help show your reliability, along with a solid employment history, adequate down payment and ample savings. Any changes during the application process—a job change, a sudden move or a new card account, for example—can signal that your finances are in flux. These changes may also delay your approval as your lender verifies information.
The safest strategy is to avoid applying for new credit while you're going through the mortgage approval process and in the months leading up to your application. Put a temporary moratorium on shopping for new card offers. And, if you think you'll need to open new credit around the same time as your home loan application—for instance, to purchase a much-needed new car—look for ways to time your applications so that your other credit needs don't interfere with your mortgage approval.
How to Get Your Credit Ready for a Mortgage
Planning ahead in general can eliminate stress. Are you thinking of buying or refinancing a home in the next year? Start preparing your credit now:
- Check your credit report and score. Find out where your credit stands and address any issues you uncover.
- Pay every bill on time. As mentioned, payment history is the most important factor in your credit score.
- Pay down your debt wherever possible. Mortgage lenders will take a close look at your debt-to-income ratio (DTI), so pay down as much debt as possible before applying for a mortgage.
- Avoid opening new accounts before and during your mortgage application. This includes car loans, student loan refinancing and credit cards.
When you pull your Experian credit report and score, you'll see a list of factors that may be affecting your score. These can provide areas of focus to optimize your score before you apply for a mortgage.
A final item to be aware of: Mortgage lenders typically check multiple credit scores, not just one. And, though the VantageScore® and FICO scores you see most often when you check any of the three major credit reporting agencies are a good general indicator of your credit standing, mortgage lenders may use slightly different scoring models, including FICO 2 from Experian, FICO 5 from Equifax and FICO 4 from Transunion.
Wait for New Credit Until After You Close
Tracking your credit reports and scores in the months leading up to your mortgage application can help you build and maintain good credit and avoid surprises when you're ready to apply. In addition to free credit monitoring, Experian offers access to multiple FICO® Score versions from all three credit bureaus, including FICO® Scores used by mortgage lenders, when you sign up for an Experian CreditWorks℠ Premium membership.
It helps to know how lenders will view your credit before you apply for a mortgage. It's also helpful to maintain your credit score and report with as few changes as possible during the approval process. Once your mortgage closes, new credit is fair game.