How Do Credit Cards Impact Your Mortgage Application?

The amount of debt you already owe is a factor in every mortgage application. Lenders use this to calculate your debt-to-income (DTI) ratio. Essentially, this number estimates your ability to repay the money you borrow: If the ratio is too high, the lender may think you’re borrowing more than you can afford. This may lead to a disconnect between the amount you’re requesting and the mortgage amount you’re approved for (if you’re approved at all).

Any and all debts in your name factor into your DTI calculation, including but not limited to housing payments, car payments, student loan payments and credit card debt. Only your minimum monthly credit card payment is used in the calculation. Of course, higher total credit card balances will result in higher minimum payments.

The exact amount of acceptable debt will vary by each loan issuer, but a common cut-off threshold is 43%. On a $100,000 annual income ($8,333 per month before taxes and other deductions), that would mean your total debts including your intended housing payment are no more than $3,583 monthly. Some loan issuers may set their limits at higher or lower amounts.

To lower your debt-to-income ratio and improve your odds of approval, you’ll need to pay down your existing debts before applying. While any type of debt paydown will have the same effect on your overall DTI, credit card debt is often the best one to focus on due to the double-digit interest rates that increase your balance exponentially.

Payment history is so important that it impacts about 35% of your credit score. Mortgage issuers want to ensure you’ll make housing payments consistently and a recent track record of hitting credit card payments on time is a strong signal you’ll pay your mortgage on time, too. Expect issuers to look into your details rather than just glancing at your credit score.

A single missed payment may not raise flags—especially if it wasn’t recent—but it’s important to show a trend of consistent payments. While paying off your entire balance is a smart way to save on interest charges, your top priority should be ensuring you submitted a minimum payment (or more) on time.

If you have trouble keeping track of due dates, setting up autopay on your credit card can solve that problem for you. Ensure your payment is linked to a banking account with sufficient funds and the card issuer will automatically withdraw the specified amount on or before your payment is due, depending on your preference.

Determining how many credit cards to have can be a complicated question. Having at least one established credit card, presuming you pay it responsibly, can actually improve your credit score and be a positive signal toward mortgage eligibility. Your credit mix, or the types of loans you have, is a small factor in your credit score. Credit cards are considered a revolving account, but mortgages, auto loans and student loans are installment accounts.

For rewards card optimizers, it’s likely that you have more than one card. That as well can lift your credit score. Multiple cards often means a higher combined credit limit, effectively lowering your credit utilization rate—another important factor in determining your eligibility for a mortgage.

Credit utilization rate looks at your current credit card balance(s) as a proportion of the total amount of credit you have available. Someone with a $1,000 balance on a credit card with a $5,000 limit would have a 20% utilization—but someone with the same total balances spread across two cards of $5,000 each would only have a 10% utilization. In this way, having multiple cards can actually help you, assuming you aren’t maxing out all your limits.

So how many cards is too many when it comes to applying for a mortgage? There isn’t an official cutoff. However, having a credit utilization rate under 30% is usually a sign you’re using your credit responsibly and a lower rate is likely even better. It’s more important that you keep the number of cards you have to an amount you can keep track of and pay responsibly. For some people, this might mean fewer cards while others may prefer to hold more cards.

New credit only impacts 10% of your FICO Score but could make or break your mortgage application, making this factor a disproportionate factor when you’re shopping for a new home. While a new credit card may only move the needle by a few points on your credit report, the timing can raise questions about how you’re handling your finances.

Adding a mortgage payment to your budget will shift your finances around as it is, so issuers want to see stability in the rest of your numbers. Whether it’s true or not, taking on additional financing around the same time as you’re buying a house might signal that you’re taking on more than you can afford. You don’t want to come off as a risky candidate.

If you absolutely must open a new credit card (or any other type of financing, such as an auto loan), this doesn’t mean you’ll automatically be denied for your mortgage or bumped to a higher-interest rate. However, it likely means you’ll need to answer more questions or provide more insight into your personal finances. That might mean a delay in your final approval. Timing is everything in a hot market, so don’t underestimate the value of a quick agreement.

Remember, mortgage companies will look at your finances when you first reach out for preapproval and again before final closing. You’ll want to show stable, responsible finances throughout this period with no sudden changes.

When you’re applying for a mortgage, your credit card profile and history can impact both whether you’ll be improved and what interest rate you’ll pay over the life of the loan. Because of this, you’ll want to do everything you can to make yourself an attractive applicant. To ensure a fair rate and easy closing, it’s best to organize your finances before applying and strive toward holding the status quo until the purchase is fully complete.