Paying Off Credit Card Balances Helps Mortgage Applicants Get Approved

Rachel Morey
April 4, 2017
Help Get a Mortgage

It’s likely that credit card interest rates will rise throughout 2017 as the Fed hikes rates, as promised. Now, more than ever, it’s important to concentrate on paying down, or even paying off credit card debt. Not only will paying down those lingering debts save you from higher interest charges, it could help give your FICO score a boost.

A higher FICO score usually means savings on all fronts in the world of personal finance. Lower mortgage interest rates could save you thousands of dollars each year. In some cases, a jump in your FICO score could even mean lower car and home insurance rates.

A low FICO score may prevent you from renting an apartment or condo. In some states, employers evaluating potential candidates will lean heavily on information contained in an individual’s credit report to make a final hiring decision. People with low FICO scores find it difficult, and in many cases impossible to get a mortgage.

Revolving vs. Transacting

The act of paying off credit card debt will help any applicant, but moving from a lifetime of revolving, or paying just the minimum amount due each month and carrying a balance, to a life of transacting, or paying off the total amount due each month, helps an applicant look better through the lens of TransUnion and Equifax’s new trending data information. It also will help boost the ever-important FICO score.

Trending data helps credit reporting agencies present a picture of financial habits to Fannie Mae’s underwriters. It helps them understand how an individual handles money month-to-month.

Previously, the two most important pieces of information to underwriters about credit card use were how much overall revolving debt an applicant carried and whether they paid their bills on the debt on time each month. Trending data offers a more complete picture of money management habits.

It’s still just as important to pay bills on revolving debt on time each month, but it’s also important to pay off the entire balance in full during every billing cycle. Mortgage applicants who carry balances from month to month will not receive the same favor as applicants who make a habit of maintaining a zero balance.

The new underwriting system evaluates applicants on their monthly payment amounts, which gives consumers who pay their balances in full each month a boost. How much of the available credit you use each month is now less important than your ability and wiliness to bring the balance back to zero when the bill is due.

Pay off revolving credit accounts as quickly as possible

It doesn’t matter to Fannie Mae’s underwriters whether the card has a 0% interest rate, so even if it makes financial sense to an individual to carry a balance as opposed to reducing the balance in an interest-bearing savings account to pay the debt, it may be wise to reduce the credit card balance to zero a quickly as possible.

An experienced mortgage lender can offer advice about specific scenarios that many help trending data look better, overall. In some cases, trading one type of debt for another could be beneficial if paying off credit cards isn’t immediately possible.

Once the cards are paid off, it’s important to watch your everyday card balance closely. Instead of paying the bill each month, when it could be tempting to let the larger balance go and just make a minimum payment, some people prefer to pay the bill in full every Friday, or with each bi-weekly paycheck.

Rising a FICO score can be tricky business. The exact algorithms are secret. For people who plan to apply for a mortgage through Fannie Mae’s underwriting system soon, changing this small financial habit could have a profoundly positive effect on their ability to get a mortgage with favorable terms.

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