6:00 am ET
September 29, 2016
If you’re hunting for a house and a mortgage, you’ve probably heard that your credit score will affect your buying power big-time, because lenders use your credit score to determine whether to give you a loan, and at what rate.
Odds are you also know that your credit score will suffer badly if you make credit card payments late, or miss them entirely. So as long as you’re current on those payments you should be fine, right?
Not exactly. Thing is, credit scores are tallied using a whole slew of factors, and they aren’t always as straightforward as whether you’ve paid your bills. Just so you’re clued in to these surprising credit score saboteurs, check out this list to make sure you aren’t destroying your home-buying odds without even knowing it.
Saboteur No. 1: Closing old credit card accounts
If you have several credit cards, you probably use the one that offers the best rewards most often. So if you’re no longer using some of your cards, you might assume it’s better to close them.
Here’s why you shouldn’t: It can hurt your debt-to-credit utilization ratio—a fancy term for how much debt you’ve accumulated on your credit card accounts, divided by the credit limit on the sum of your accounts. This ratio comprises 30% of your credit score. By closing a credit card account, you reduce your available credit—making it more difficult to keep your debt-to-credit utilization ratio below 30% (the recommended percentage).
Closing an old account also reduces the average length of your credit history, another variable that factors into your score. Lenders like to see that you have a solid track record of paying your credit card bills on time.
Bottom line: Never close an old credit card; it won’t reflect well on you.
Saboteur No. 2: Opening a new credit card
Given the above, you might think the more credit cards, the better! Ah, but that would imply that getting a mortgage is a simple and transparent affair.
Actually, applying for a new credit card can ding your score by up to 5 points, says Beverly Harzog, a consumer credit expert and author of “The Debt Escape Plan,” because it results in a “hard inquiry” on your credit report.
That hit might seem minuscule, but if you’re on the cusp of having a good credit score (700 to 759) or an excellent credit score (760 and above), a 5-point reduction could push you into a lower category—and prevent you from qualifying for the best interest rates on a home loan.
Bottom line: Don’t get a new credit card within three to four months of applying for a home mortgage, advises Harzog. And yes, this includes department store credit cards.
Saboteur No. 3: Not using your credit cards
Isn’t it good to not go crazy using your credit cards? Yes, but on the flip side, don’t let them languish unused, either. That’s because if you don’t use your credit card for an extended period of time—typically six months—your card issuer might decide to close the account (given you’re not generating revenue for the company). And as you might have guessed by now, this would lower the average length of your credit history, thus damaging your credit score.
“If you’re not an active credit card shopper, you still need to dust off your card from time to time,” says Harzog. To keep your credit cards active, Harzog recommends charging a purchase at least once every four months—and, of course, paying it off in full.
Saboteur No. 4: Failing to pay your medical bills
Credit cards aren’t all you’ve got to make sure to pay. When you default on medical debt, your doctor’s office or hospital will likely outsource it to a debt collection agency, says independent credit expert John Ulzheimer. The debt collector may then decide to notify the credit bureaus that you’re overdue on your medical payments—placing a deep black mark on your credit report.
Your best move? Be proactive. If you know that you’re going to miss a payment, notify your medical provider ahead of time.
“Many doctors and hospitals will work with you to create a payment plan,” says Gerri Detweiler, head of market education at Nav.com, which helps small-business owners manage their credit.
Saboteur No. 5: Co-signing a loan
When you co-sign a loan, you’re responsible if the primary borrower defaults on the debt, Ulzheimer warns.
“Co-signing for a loan is essentially no different than you applying for the loan yourself, in the sense that your credit score is at risk,” he says. Translation: Think twice before co-signing your son or daughter’s car loan or apartment lease.
Saboteur No. 6: Missing payments on a business credit card
This one surprises almost everyone. If you own a company and have a credit card for business expenses, you might assume your business activities won’t affect your personal credit history. Sorry to break it to you, but they do. (Just to be clear: This doesn’t apply to employees who have a corporate credit card, just owners.)
“As the business owner, you’re personally liable for the business’ credit card debt,” says Ulzheimer. “If you default on the card, your creditor can report it to the credit bureaus, which can hurt your credit score.”
Even just applying for a business credit card can temporarily ding your credit score, because the card issuer will look at your credit score to determine how trustworthy you are—and that’s another hard inquiry on your credit report. So, don’t assume business and pleasure won’t mix, and tread carefully.
But here’s some good news: There are plenty of ways to boost your credit score before buying a home. Try a few tactics to get your home-buying on track.