Don’t Swipe Your Credit Card Before You Apply for a Mortgage

Last updated on May 1st, 2018
Don’t Swipe Your Credit Card Before You Apply for a Mortgage

Large Credit Card Purchases Really Can Tank Your Credit Score

  • While missed payments are arguably the worst
  • Even racking up a lot of debt can lower your credit score
  • So it’s best to put the spending on hold
  • A few months before applying for a home loan

You’ve probably heard at some point that making large purchases with your credit card(s) before applying for a mortgage is a no-no.

In fact, you may have read that on this very site, since I’ve warned about it on numerous occasions in multiple posts.

You might be aware of this issue, but shrugged it off, thinking what’s a few points, right? You already have excellent credit so it doesn’t matter if you purchase a new $5,000 couch with your AmEx card for the new digs.

Well, think again. It really does matter, and it can do serious damage to your credit score. I’m not just talking about 5-10 points. I’m talking enough movement to potentially take you out of the running for a mortgage altogether.

My Credit Score Got Rocked

my score

  • I maxed out one of my credit cards
  • And my excellent credit score dropped about 50 points
  • That’s enough to raise your mortgage rate
  • Or worse, disqualify you from obtaining a mortgage

Let’s take a look at a very real example; my credit score over the past year. Yes, I’m using my own credit score to illustrate this very real problem. Fortunately, I didn’t apply for a mortgage during this period so it wasn’t an issue for me.

But for those who followed my path and did, it could have spelled serious, serious trouble.

For most of the past year, my credit score has been stuck in a range from the low 800s to around 820. This is good because it means I won’t have any issues qualifying for a mortgage based on credit score alone.

Not only that, but I’ll also get the most favorable rates and avoid as many mortgage pricing adjustments as possible. Once you get above 760 there aren’t many credit score adjustments (if any) to worry about.

However, when the holidays hit I started making a lot of purchases on my credit card. There was a promotion with Discover and Apple Pay that offered 23% cash back on all purchases so I hit it hard.

I basically maxed out my Discover card, which had a pretty dismal credit limit because Discover is a pretty conservative lender. When all was said and done, I think I had 1% available credit on the card, otherwise known as 99% utilization.

This is not a good idea, especially before applying for a mortgage because it will literally tank your credit score, even if you pay off the balance in full by your due date.

The problem is that the credit bureaus will take a snapshot of your credit balances on a certain date and then compute your credit score based on that information.

Chances are TransUnion saw this maxed out credit card and docked my score accordingly, basically assuming I was going down a bad path by making a ton of charges. This is usually a signal that a consumer is in trouble financially.

In the matter of a couple months, my credit score fell nearly 50 points. From peak to trough, it fell a total of 65 points. I went from having stellar credit to having very good credit. Still, my score was below 760, which could cost you on a mortgage.

I Bounced Back!

  • The good news is that it was short-lived
  • My credit score bounced back fairly quickly
  • Once I paid off the credit card debt
  • So you can resolve it, assuming you have time to do so
  • The takeaway is not to chance it!

Now the good news. Once I paid my credit card bill in full, and the bureaus took note of the new $0 balance (this isn’t immediate), my credit score shot up to its highest point in the past 12 months.

My 758 credit score was now 826, not too far from the perfect credit score of 850. It’s also the highest it has been since Credit Karma began keeping track of it a couple of years ago.

So despite the big hit early in 2016, I’m in even better shape than I was to begin with. This is great, but had I applied for a mortgage a month or two ago, I could have jeopardized the entire thing.

For someone with a lower starting score, they could have knocked themselves out of eligibility, or at minimum been forced to take on a higher mortgage rate as a result.

The moral of the story is to heed the warnings of avoiding large purchases before taking out a mortgage. It’s no joke. For the record, the same can be said of cash because you’re depleting your assets if you make large cash purchases.

In other words, practice frugality before and during the mortgage application process and until the loan is funded. Those purchases can wait and you’ll be better for it. After all, mortgages can stick with you for decades – you’d hate for one ill-timed purchase to haunt you for years to come.

Interestingly, once you get your mortgage, you might be able to pay it with a credit card, not that it’s necessarily a good idea.

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