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If you are buying a house soon, don't open a new charge card

Example of how opening a new charge card before and during applying for a mortgage loan can hurt you.

Let’s say you are in the market to purchase a home sometime soon. You currently have two credit cards MC and Visa for 10 years and 8 years, respectively. You have good history of payments with large credit lines of $5,000 and $10,000. Your current balances on these two credit cards are $1,000 and $2,900 respectively. You had no inquiries for opening a new card in last two years or so.

 

We have the following table summaries the information showing everything is within the guidelines and are OK.

 

 

Impact Credit Score

Credit Card

Credit Line

Current Balance

Amount Owed/ Credit Line %

Length History
Years

Inquiries
Since Last Year

No. of

Cards

Card#1

$5,000

$1,000

20%    OK

10  OK

0  OK

1

Card#2

$10,000

$2,900

29%    OK

  8  OK

0  OK

1

Total/Avg.

$15,000

$3,900

26%    OK

  9 OK

0  OK

2  OK

 

Now you are in a store looking at a beautiful couch that you fall in love. It is on sale for $1,500 but if you open a store charge card you could get additional 20% off, bring it down to $1,200. You cannot resist and open the new charge card to purchase the couch. You will be given a credit line of $1,500 with interest rate of 18%. Your Balance or purchase with Tax is $1,300.

 

The new Table will be as follow:

 

 

Impact Credit Score

Credit Card

Credit Line

Current Balance

Amount Owed/ Credit Line %

Length History
Years

Inquiries
Since Last Year

No. of cards

Card#1

$5,000

$1,000

20%    OK

10  OK

0  OK

1

Card#2

$10,000

$2,900

29%    OK

  8  OK

0  OK

1

New Card

$1,500

$1,300

86.7% Not OK

0  Not OK

1  ?

1

Total/Avg.

$16,500

$5,200

31.5%   Not OK

  6 Reduced

>0  Reduced

3

 

As you see just by opening a new charge card, a couple of areas go outside of the boundries, as shown with red and yellow colors, and have negative impact on credit score. This could cause higher interest rate which in turn cost a lot more for the purchaser at the end.

Conclusion:

Again, if you are buying a home sometimes soon, don’t be tempted to open a store charge card to receive discounts. Though, these discounts can be huge, sometimes up to 25% of your purchases on the first day, however, this new card could cause your credit score goes down for the following reasons:

·         The Ratio of (Amount Owned) / (Credit Line) for the new card as well as total accounts goes up.

·         Average Length of your Accounts history goes down

·         Number of Inquiries in the last year or so goes up

·         Number of Credit Cards on hand goes up

To find out more about your credit score and how to get a free copy of your credit reports, or find out about credit scores in general and tips on how to improve your credit score, please read the appropriate articles from following web pages:

What is a credit score,

What makes up a credit score, Tips on how to improve their credit score,

What impact they have on your Interest rates & why they are important,

List of Do’s and Don’ts they should do before applying a mortgage loan

List of Do’s and Don’ts after being approved for a mortgage loan. and

How Long Do I Have To Wait After Foreclosure or Bankruptcy

Contact us about your Credit Score Questions

Equal Housing Opportunity Commission Bahman Davani REALTOR

Bahman Davani, CM
Broker/REALTOR®
ABR, GRI, CDPE, SFR,
TAHS, eAgentC, and
CCIM Candidate

Office: (214) 457-7055
Cell: (214) 457-7055
Fax: (972) 596-7984

P.O. Box 261665
Plano, TX 75026-1665

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Texas Five Star Realty
P.O. Box 261665
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, TX 75026 US
Phone: 214-457-7055
Website: www.texasfivestarrealty.com/
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