What is Better? Fewer Cards with Higher Balances, or Many Cards with Smaller Balances?
by
Scott Bilker |
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Scott,
My husband and I are preparing to buy a new home. We want to clean
up our credit card accounts to better our chances for a mortgage. We
were considering paying off our credit cards with smaller balances
using other credit cards.
What is better when your credit is being
considered for a home loan--fewer credit cards with higher balances
or more credit cards with smaller balances? The cards we are
planning to pay off we are going to have closed so there are fewer
credit accounts opened. Is that a smart move?
Christina
Christina,
Thanks for writing!
That's a great question!
Since your goal is getting a mortgage
I would have to say that having fewer credit cards with higher
balances is going to be the better case. The reason is because with fewer cards, you'll
(theoretically) have a
lower amount of available credit. That is certainly a
consideration for banks when they review your credit report, or as I like to
call it, your "credit résumé."
Let's look at a few numbers. Say you had
three credit cards. Each has a $5,000 limit and a balance of $1,000.
At this point you have a $15,000 limit and $3,000 debt. Many
mortgage lenders may view that as a possible unsecured debt of
$15,000.
By consolidating all that to one card,
you'd have a $3,000 balance with a $5,000 limit. That will certainly
look more favorable to lenders.
Since you have many credit cards, you
also have some options to get some great rates! When deciding which
credit cards to use to consolidate your debts, be sure to give them a call.
Tell them, "Here's the deal. I'm consolidating all my debts to
the fewest cards possible and closing my other accounts. If you
want to keep making money, then you'll need to give me a great rate
or else I'm gone!" If the first rep can't do that, then ask to
speak to their supervisor.
In my opinion, at this point in time, a good rate is 4.9%
fixed until it's paid off, 0% for one year, or a 9.99% fixed rate
for life on all purchases and charges. Your options will depend on
your history with each credit card company and their thirst for profitable
customers.
When we purchased our house, we had 24
credit cards with a total of $24,000 and still got approved for the
mortgage! They didn't say a word. The reason is because we've never
had a late payment. Paying on time is one of the most critical
elements
to getting the best deals and having the most credit options.
One more tip: This is the exception
for keeping your cash! Don't reduce your debts by paying them off
with cash because you'll need that cash for the down payment and
closing costs. After you're in the new house, then pay off the credit
cards with any remaining cash.
Good luck, and please let me know what
happens!
Regards,
Scott
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