Applying for a new credit card can complicate your homebuying experience. To minimize the risk of credit-related issues during the mortgage process, it’s best to avoid making any major changes to your credit activity, including opening new credit cards.
Here’s what to know about how a new credit card can affect your mortgage application.
Opening a new credit card can affect your mortgage application and approval, as well as your home loan interest rate. During the mortgage process, your finances (and particularly your credit) are under a microscope. In some cases, you may need to explain to your lender in writing why you opened the account.
Lenders typically monitor your credit throughout the closing process, watching for any signs that could indicate a change in your financial situation and ability to make your mortgage payments. They may review changes to your credit score, new credit activity and big purchases to ensure you’re still financially ready for homeownership.
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Should you open a new credit card after applying for a mortgage?
Though you may want to open a new credit card to cover moving expenses or new furniture, it’s generally recommended to hold off until your mortgage process is complete. Applying for a new credit card can affect your credit score and overall mortgage eligibility. If your credit score drops from opening a new credit card, your lender may raise your mortgage interest rate, increasing your total loan costs.
The bottom line: It’s better to be safe than sorry and avoid opening new credit cards during the mortgage process — if you can.
Read more about what credit score you need to buy a house.
Does applying for a credit card affect your credit rating?
Yes, applying for a credit card can affect your credit rating, which in turn can impact your mortgage application. A new credit card:
→ Lowers the average age of your accounts. Opening a new credit card can reduce the average age of your accounts, which can ding your credit score. For the same reason, it’s best to avoid closing old credit accounts during the mortgage process.
→ Affects your credit utilization rate. If you open a new credit card and don’t carry a balance, it can actually improve your credit utilization rate since the amounts owed on your credit accounts make up 30% of your credit score. But if you open a new card and rack up a balance, it can increase your credit utilization, which may hurt your score.
→ Counts as a hard inquiry on your credit report. Applying for a new credit card results in a hard inquiry on your credit, which can temporarily drop your score. Opening new credit cards during the closing process can look risky to your lender and may raise concerns about your financial stability.
→ Impacts your credit mix. Creditors like to see that you can handle different types of credit. Applying for a new credit card can boost your score if it adds to your overall credit mix, which accounts for 10% of your credit score. However, you shouldn’t open a new credit card solely for this reason.
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Credit is one of the main factors that mortgage lenders consider when deciding whether to approve you for a loan, as well as the interest rate to charge. To boost your approval odds, follow these steps to enhance your credit profile.
1. Pay your bills on time
Making on-time payments is one of the best ways to improve your credit score over time, since payment history accounts for 35% of your credit score. Missing even one payment can hurt your credit, and late payments typically remain on your credit report for up to seven years.
2. Limit your new credit
It’s generally a good practice to limit how much new credit you take out at once, but it’s particularly important during the mortgage process. Each time you apply for a credit card or loan, the credit bureaus consider it a hard inquiry on your credit report, which can lower your score.
3. Dispute errors on your credit report
Credit reporting errors, including older accounts due for removal and accounts with inaccurate payment histories, are relatively common. If you see a mistake or signs of credit fraud on your report, contact the credit bureaus to file a dispute. You may see your credit score improve as a result.
4. Pay attention to your spending
It’s best to avoid making large purchases on credit during the mortgage process. A lender may not care if you use your credit card for smaller transactions, especially if you pay off the card balance quickly. However, larger purchases may give them pause.
5. Don’t close your old credit cards
Closing credit cards, especially ones you’ve had for a long time, can hurt your credit. When you close a card, you no longer have access to its credit limit, which affects your credit utilization ratio. It can also hurt the average age of your accounts and your credit mix.
6. Pay down your debts
Paying down revolving debt balances, including your credit cards, personal lines of credit and installment debts — like your auto and student loans — can boost your credit score.
Frequently asked questions
Debt consolidation can affect your ability to buy a home in various ways, both positive and negative.
- Positives: It may improve your debt-to-income (DTI) ratio and lower your monthly payments.
- Negatives: If the consolidation loan payment is too high, missing payments can hurt your credit.
In addition, applying for a debt consolidation loan will result in a hard inquiry on your credit report, which may harm your credit.
Most lenders will run a final credit check right before closing to review your financial situation and see if you’ve taken out additional credit cards, loans or other types of debt. However, the exact timing of the last credit check will vary by lender.
There isn’t a specific amount of time you’ll need to wait to apply for credit after closing. Generally speaking, once you’ve closed on your mortgage and the paperwork is finalized, you can apply for new credit without it affecting your mortgage. Of course, it’s best to only apply for credit that you need and avoid overspending to maintain a good credit score.
You can use a credit card while waiting for your mortgage to finalize. However, it’s a good idea to limit how much you spend and pay off the balance quickly. Making a large purchase on your credit card during the home closing process can jeopardize your mortgage approval.
It’s generally best to avoid making any major changes to your credit history before applying for a home loan, including closing a credit card. Closing a credit card can impact the average age of your credit accounts, especially if you’ve had the card for several years. The length of your credit history makes up 15% of your credit score.
