Once you start making moves to buy a new home, it’s time to put your credit card applications on hold.
Opening a new credit card while taking on a home loan can have long-term effects on your finances. Both credit card issuers and mortgage lenders rely on your credit report and credit score to make lending decisions and assign interest rates. Any changes to your credit while buying a home may affect your mortgage approval.
Before you start the mortgage application process, learn more about how it can be affected by other credit applications and new accounts.
In this article:
The risks of opening a new credit card when applying for a mortgage
Because your credit score is a major factor lenders use to assess your mortgage application, having the best possible credit can help you qualify for the best rate.
Long-term, credit cards can give your credit score a boost. A new card will lower your credit utilization ratio by giving you access to more available credit. Regularly paying off your card on time also builds your positive payment history. And if your new credit card adds to the different types of accounts on your credit report, it can also increase your credit mix.
Each of these criteria factors into your overall score and can help you build credit. If you’re not planning to take on a mortgage for a few years, using a credit card to build credit could be a good strategy.
But if you’ve already started the homebuying process, there are a few reasons why a new credit card may temporarily hurt your score — and your mortgage application.
Hard credit inquiry
When you apply for a loan or a new credit card, the lender typically uses a hard credit inquiry to check your credit. This type of inquiry can lead to a slight, temporary drop in your credit score.
Why? Your credit score takes into account how often and how recently you’ve applied for new credit. This isn’t the most influential factor, making up about 10% of your overall FICO credit score. But it can still make a difference. If you just opened a new credit card, you haven’t had a chance to prove you can use it responsibly — which could be a red flag for other potential new lenders or creditors.
And the more inquiries you have, the more impactful they may be. While one hard inquiry will only have a small effect on your score, you don’t want to apply for multiple credit cards in a short time period. This can hurt your credit score anytime, but it’s especially risky when you’re trying to get a mortgage and want to apply with the best credit possible.
However, credit checks conducted for mortgages or other installment loans are treated differently. If you’re shopping around with different lenders for the best mortgage rate, you don’t have to worry as much about multiple hard credit inquiries affecting your score. You can get multiple loan estimates from different lenders within a 45-day window, and they’ll only count as a single inquiry on your credit report.
Age of accounts
If you apply for and then open a new credit card account, you could also affect your credit score by bringing down the overall average age of your accounts.
This is more impactful for people without a strong credit history. If you’ve been building credit for several years and have several accounts already on your credit report, one new account will make less of a difference overall.
Like hard inquiries, the age of your accounts is not the most influential credit scoring factor. It may only affect your score by a few points and level off over time. Normally, this shouldn’t keep you from applying for a new credit card that can help you save money and build credit in the long run.
But when you’re applying for a mortgage that you’ll be paying off for years — or even decades — it can be more beneficial to wait and take the credit hit after you’ve closed on the larger loan.
Remember: The above credit score consequences don’t only apply to new credit cards. If you apply for a personal loan, car loan, student loan, or any other type of debt or line of credit too soon before taking on a new mortgage, you could impact your home loan approval and terms.
How much can a card application affect your mortgage rate?
There’s no exact estimate to tell you how much more expensive your mortgage might be if you open a new credit card during the application process.
One reason is because the specific mortgage interest rate you qualify for depends on many factors. Your credit score is one, but APRs are also determined by your loan amount, type of loan, down payment amount, and more.
For most people, a single credit inquiry should only take about five points off your credit score, according to FICO. But the specifics of your credit report can have an impact; the shorter your credit history (or the thinner your credit profile), the more significant drop you might experience.
Mortgage payments and credit score
Even a very small dip in your score could potentially leave you paying thousands more over your entire mortgage loan term.
The average mortgage rate for homebuyers with credit scores between 640 and 659, for example, is 7.818%, according to FICO. But for those between 660 and 679, the current average drops to 7.388% APR.
On a 30-year fixed mortgage for a $300,000 home, that’s a difference of about $90 each month and $32,000 over the lifetime of the loan.
While a difference of a few points on your credit score may not seem like much, it could potentially save you a lot of money over time. For most people, it’s better to be safe — and wait a few months before applying for your new credit card — than to pay a higher mortgage for decades to come.
What about closing a credit card?
Closing a credit card account may also affect your credit score — and, in turn, your mortgage application. Closing a card can be smart if you’re not getting enough value to justify the annual fee or if you’re tempted to use the card to overspend.
But in this case, you may want to wait to make your decision. In general, it’s best not to open or close a credit card while getting a home loan.
Closing a credit card lowers your overall credit utilization. Say the card you want to close has a $10,000 limit, and your overall available credit across card accounts is a total of $20,000. That could slash your available credit in half — and leave you with much less wiggle room to stay below the recommended 30% credit utilization ratio.
Just like opening a new card, closing an existing credit card can also lower your average account age. Especially if the card you want to close is one of your oldest credit card accounts, you could significantly lower the average age of accounts on your credit report.
As a rule of thumb, it’s a good idea to avoid any changes that could impact your credit score shortly before you begin applying for a mortgage.
Practice good credit habits ahead of your loan application
Because your credit score can make a big difference in helping you lock in a lower mortgage interest rate, it pays to practice good credit habits in the months before you apply for a home loan. This includes not applying for any new accounts whenever possible. Here are some other actions to take, too:
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Keep a positive payment history: Pay all your bills on time each month. Paying at least the minimum monthly payment by the due date will help you build a positive payment history, which proves to lenders that you’re able to manage your accounts wisely over time. This is the most influential factor in your credit score.
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Watch your credit utilization: Keep an eye on how much you’re spending with your credit cards. If you spend too close to your credit limits, you’ll risk a high credit utilization rate, which could lower your credit score. Credit utilization is the amount of available credit you’re using compared to how much you have available — and should stay around 30% or less. If you have $10,000 in available credit, for example, you’ll ideally want to keep your balances below $3,000, even if you pay them off each month.
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Pay down existing debt: If you have any credit card debt already, put as much money as you can toward paying it off to help your credit score. This will help lower your credit utilization since your issuer will report lower balances to the credit bureaus. Plus, paying down any existing debt (not only credit card balances) will also lower your debt-to-income ratio (DTI), another big determining factor for mortgage lenders.
This article was edited by Alicia Hahn
Editorial Disclosure: The information in this article has not been reviewed or approved by any advertiser. The details on financial products, including card rates and fees, are accurate as of the publish date. All products or services are presented without warranty. Check the bank’s website for the most current information. This site doesn’t include all currently available offers.