Question: credit card balances & credit score

MomtobeNJ · March 2014

This is a basic, probably dumb question but DH and I are househunting and I'm really trying to get a handle on all our expenses and be smart about this.

Ok, so I have a few credit cards with small/moderate balances. Nothing huge, but the interest rates on a few of them are high. I got a balance transfer offer from another card that would give me 0% interest on transfers for 1 year. That should be plenty of time for me to pay the amounts off entirely so I will definitely be saving money. However, that would make that credit card VERY close to its limit. So what's worse: several cards with smaller balances or one card with a significant (almost to the limit) balance?

Ultimately, right now I am most concerned about my credit score and how the mortgage lenders will view my profile.

Thoughts?

Pokedot · March 2014

We just refinanced so we went through this. Well getting our credit score, debt to income ratio, etc. The best thing to do is pay off as many as possible. If the limit on one card is almost maxed it looks "bad" to a lender. Since you've maxed your card out. By paying off a card or 2 your credit score will improve. Also I never knew this but a CU (I can't speak for a bank) could care less if you have money in savings. They look more at your credit history through credit cards. So for example, say you have $4000 in savings but $4000 on CC. Even if you take $1000 and pay off 1 CC your score improves over having that $1000 in the bank. Savings is for your own peace of mind. I found that kind of interesting.

ETA: I would talk to your lender about what will be best for your situation as well. They can give you great insight into what will work for you.

MomtobeNJ · March 2014

That's what I thought, because I remember hearing that your debt/income ratio and your available credit are the 2 most important factors.

Thanks!

Being responsible with money sucks. I want a manicure and Starbucks.

hmp1 · March 2014

Just don't close out your credit card if you do a balance transfer. They will look at your combined open credit to debt. After you close on your house you can close out the card if it has a fee. If it doesn't have a fee or it is giving you points more than the fee, I would responsibly use it and pay it off each month.

Also, call that company that holds your balance and let them know that you plan to transfer it to a 1 year no interest card with a lower interest rate after and see if they are willing to match the deal.

Most important is to have a lender run everything now and have them tell you if you can open a new card right now. We have really good credit and opened a new card a month or so before buying our house and it didn't make a difference on our interest rate.

MomtobeNJ · March 2014

Thanks for your input, @hmp1. It's not a new card we would be opening - it's an existing card that is offering the 0% on transfers. But I am definitely going to call the higher interest card and ask about lowering our rate. Can't hurt to ask. And if not, I am going to close it after we buy the house.

hmp1 · March 2014

MomtobeNJ said:

Thanks for your input, @hmp1. It's not a new card we would be opening - it's an existing card that is offering the 0% on transfers. But I am definitely going to call the higher interest card and ask about lowering our rate. Can't hurt to ask. And if not, I am going to close it after we buy the house.

Oh, if it isn't a new card I would absolutely do it if the other card won't match the deal. And then wait to close it until after you close on house. Good plan.

MomtobeNJ · March 2014

Well, @Pokedot was talking about refinancing, so maybe that's what was true in her case. We have the money for a down payment and we're not touching it so that's not going to change based on the scenario I asked about. But you're right about needing to have liquid funds, @cheeseandrice. I am also trying to throw some extra money at the credit cards in the next few months without dipping into the money put aside for the down payment.

Hence, my Starbucks strike.

(

MomtobeNJ · March 2014

mssm2012 said:

How much in interest savings are you talking about? If you're going from 25% to 0%, and you'd be able to pay off a significant amount of principal (that would otherwise go to interest) in the next couple months, before the bank runs your credit, do it. ETA: @cheeseandrice‌ is completely right. For buying a house, your credit score matters, but so do all the other things. In reality the balance transfer won't change your score by more than a few points either way, but the other factors/ratios may be a bigger deal for underwriting.

This is exactly why I was asking.

I appeciate all the input.

Pokedot · March 2014

cheeseandrice said:

Do you know who you're going with for a mortgage lender yet? That's a good place to start with questions too

In our case, we just moved states and opened up a new checking, savings, CC, and personal loan with our new credit union. The personal loan was to pay off an existing loan with our old bank (student loan consolidation originally.) Normally this would have been insane to do all that right as we were getting pre-approved. BUT it was all within the same organization, so it wasn't a problem at all. We were able to use one credit score pull for all of it too, which was a huge deal.

Can I also just say that dealing with a CU was way better than a bank. Our original mortgage was US Bank and went with a local CU for the refinancing. The entire process took 3 weeks to do and was extremely easy. The fees were insanely cheaper than closing with the bank. We'll never do business with a bank again! Did you find the same thing to be true @cheeseandrice ?

ETA: Didn't quote right

ktnicole · March 2014

Or sometimes you can refinance with a bank without closing costs or appraisal fees. In fact a bank listed above ^^

ktnicole · March 2014

Not that bank

ktnicole · March 2014

And now there is a credit advertisement on the bottom of my screen.

kelbel527 · March 2014

tl;dr - Maxing a card may not be best, but like everyone else said, talk to a lender and they'll help you decide your best option for underwriting.

Everything I've been reading about credit scores says that it's better to have smaller balances on a few cards than to be close to maxing out one card. We're in the process of preapproval right now and the mortgage lender actually asked us about a card that had a few thousand dollars on it (only 26% of the total available balance), which is the card we use to rack up rewards and pay it off in full every month. We also have several other cards that have 0 balances on them, so our total debt to available debt is really really low. So I thought it was weird that they asked about it. Once we explained it, she got it and I don't think it's an issue, but it may be a bigger issue if it's a card that's already maxed.

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