In this Post:
- Applying for Cards Lowers Your Score
- The Day After
- Mix it Up
Applying for Cards Lowers Your Score
When you apply for a credit card you lower your FICO score by 3-5 points. This might not seem like much, but the truth is that mortgage interest rate calculations can be very subjective. Sometimes just a couple of points can mean a pretty big difference in your interest rate.
In fact, let’s say you are buying a house with a $150,000 mortgage. At an interest rate of 5% your principal and interest payment would be about $805 a month, with just under $140,000 interest paid over the life of a 30 year loan. But at 6% interest – just a 1% interest increase – your payment would be nearly $900 a month, with nearly $174,000 in interest paid out over 30 years. That means, the house will have cost you almost $34,000 more!
Right before you get a mortgage is not the time to buy a car, get a new credit card or do anything else that could possibly hurt your credit score by so much as a point. This is the time to pay your bills on time, pay off as much debt as you can, and put yourself in the best possible position to get a good mortgage interest rate.
On that note, it’s good for you to know that you can feel free to apply for a few mortgages from different companies within a six month period, and these applications won’t negatively impact your credit.
The Day After
The great news is that banks seem to come out of the woodwork after you buy a home. So opening a credit card before buying a house is also best deferred because you may get better offers after the house is bought. Creditors figure that if you passed the mortgage lender’s tests, you are probably good enough for them. So this is a great time to sit back and enjoy the credit offers piling up in your mailbox. Just don’t apply to any of them until your mortgage is signed and closed.
In fact, after you pay on your mortgage for a couple of months there is a great chance that your credit score will have gone up. This can open even more doors to greater credit card deals.
Mix it Up
Remember that part of your credit score involves having a mix of different types of accounts. So having a credit card or two, a mortgage, and a car loan can all help build your credit score, thus leading to even more favorable terms on new accounts in the future. But be careful about using a credit card while buying a house; you don’t want to increase your balances until after the mortgage is closed.