Should You Stop Earning Credit Card Rewards Before You Buy a Home?
April 19, 2018
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Purchasing a home is an exciting and momentous occasion, but it’s one that’s often rife with stress. From beginning to end, you have myriad chores to take care of — things like saving up for a down payment, negotiating with sellers, getting a home inspection, preparing for closing costs, and making repairs before you move in. While the end result of homeownership can be well worth it, buying a home is still a lot of work.
And, what about your credit? Obviously, you probably spent years building your credit to where you could qualify for a mortgage on your own. You paid all your bills on time, maintained a smart credit mix, and avoiding taking on too much debt. You’ve done everything right, and you don’t want to mess up now.
With that in mind, you may be wondering if credit card rewards could ruin your home purchase. The reality is, the credit cards you have in your wallet shouldn’t cause any damage if you handle them responsibly.
Here’s the skinny on how credit cards can help — or hurt — your chances at getting a mortgage.
Do Credit Card Rewards Hurt Your Chances of Owning a Home?
While it is often repeated that pursuing credit card rewards can hurt your credit, this is rarely the case. Since your “credit mix” makes up 10 percent of your FICO score, having different types of credit — things like car loans, personal loans, student loans, and credit cards — can actually improve your credit score. In other words, having a few rewards credit cards is usually a good thing.
Keep in mind that the top two factors that determine your FICO score are your payment history (35 percent of your FICO score) and amounts owed (30 percent of your FICO score). “New credit” is another factor that makes up only 10 percent of your FICO score. Last but not least, the average length of your credit history makes up another 15 percent.
The reality is, there are two main ways credit card rewards can hamper your home purchase — if you’re signing up for too many rewards cards or you have too much debt.
Opening too many credit cards at once can hurt you in a few ways. First, opening new cards dings you in the “new credit” category right off the bat. While a handful of new cards throughout the year may not cause your FICO score to drop too much, many new cards at once can cause some temporary damage.
The other way too many new cards can hurt you is when it comes to the length of your credit history. Your FICO score is determined using the average length of your credit history, and each new card you open may shorten your credit history length significantly.
Last but not least, we already talked about how debt could hurt your credit score and your chances of getting a mortgage. The more debt you have when compared to your credit limits, the higher your credit utilization. While utilizing some of your open credit by carrying a balance isn’t always a bad thing, most lenders prefer to see credit utilization below 30 percent.
But, if you’re carrying credit card debt, should you really be pursuing credit card rewards? Probably not.
How to Pursue Credit Card Rewards While You Shop for a Mortgage
If you’re planning on buying a home and want to make sure your rewards game doesn’t stand in the way, there are steps you can take now to ensure you stay on the right track. Some tips that can help keep your credit in the best possible shape for a mortgage include:
Hold off on signing up for new cards until you own your home. Once you decide you’re ready to buy a home, it’s smart to steer clear of signing up for new credit cards until your new home loan has closed. Doing so will prevent you from having to fill out extra paperwork or having to answer a bunch of questions about why you opened new lines of credit while trying to get a mortgage.
Keep all your old credit card accounts open. Because of the way your FICO score is determined, keeping old accounts open can be advantageous - even if you’re not using them. By keeping old accounts open, you can increase the average length of your credit history and boost your score in the process.
Pay down debt if you have any. Remember how your credit utilization can ding your score if it’s too high? If you’re worried about utilization, the best thing you can do is focus on paying off all your debts or as many as you can. You should start focusing on paying off debt before you apply for a mortgage to give yourself the best chance at improving your score early on.
Focus on maximizing the cards you have. While it may be a bummer that you can’t sign up for new travel or cash-back cards while you’re getting ready to buy a home, this may present the perfect opportunity to learn how to maximize the cards you have. If you have cash-back cards with bonus categories, for example, you can spend your time and energy making sure you’re taking full advantage. Maybe you have several cards with different bonus categories but have never gotten in the habit of using the optimal card for each purchase you make. Whatever your habits are, use this time to find ways to improve them and you’ll be a lot better off in the end.
The Bottom Line
It’s good to know that pursuing credit card rewards won’t destroy your chances at getting a mortgage, but you can still take steps to improve your chances at getting the best deal. By avoiding new credit cards, paying off debt, and keeping old accounts open, you can improve your chances to raising your credit score so you get a new home loan with the best terms possible.
While credit card rewards shouldn’t hurts your chances at homeownership, there are still plenty of ways to help yourself.