By Sabrina Karl
If you’re considering applying for a new or refinanced mortgage, thinking through your credit and debt is an important first step. If you’re carrying credit card debt, it’s natural to wonder how paying it down will impact your application.
Card debt affects your mortgage request in two ways. The first is your credit score. Qualifying for a good mortgage rate doesn’t require excellent credit, but it helps. If you can raise your score above 760, or even 780, you’ll likely receive the best rate offers.
Whatever your score, consistently paying your cards on time is the No. 1 way to boost your score. That said, how much card debt you’re carrying compared to your available credit line, called card utilization, is also a factor. An account with a high credit limit but a small balance is rated more favorably than one that’s maxed to the limit.
So paying down a balance can lower your credit utilization and improve your credit score. If your card isn’t maxed out, you can also try requesting a credit limit increase. By not adding more debt after the limit is raised, your credit utilization will improve.
The other way card debt impacts your mortgage application is its impact on your debt-to-income ratio, or the percentage of your monthly income that goes to monthly debt obligations. But the minimum monthly payment is what lenders count here, not the full balance. So unless the total minimum payment on all your cards is very high, this may have little bearing on your mortgage approval.
It’s also critical to consider your available cash on hand. Paying down card balances will reduce your cash for a down payment and reserve. So if cash is tight, paying down card balances may hurt your application more than help it.