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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.
|
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:
|
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
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