When applying for a mortgage, is having a credit card with a $3,000 limit considered the same as having a $3,000 debt even if the balance owed on the card is zero? I would like to know if it would be better to lower the credit card limit before shopping around for a mortgage.
If you are paying your balance off on time and are not maxing out your card, do not lower your credit card limit. Doing so may actually have a negative impact on your credit score. (Your credit score is taken into account when approving you for a loan). Among many other factors, part of your credit score is determined by your debt-to-credit ratio. For example, let’s say that you have a $1,500 balance on your credit card. This means that you have maxed out your card by 50% (1500 divided by 3000). If you were to lower the limit to $2,000, your card would then be 75% maxed out (1500 divided by 2000). Potential lenders would prefer to see a lower debt-to-credit ratio on your credit card than a higher one. The bottom line—if you’re able to handle debt responsibly, there really is no advantage to lowering your credit card limit prior to looking for a mortgage.
Although it’s good to keep a low debt-to-credit ratio, keep in mind that your entire credit history is taken into account when you apply for a mortgage. A potential lender is not only looking at your debt-to-credit ratio, but also other parts of your credit history such as the number of credit cards you have, your total available credit (among all your credit cards), and whether you’re making your payments on time. Among the most important factors in getting approved for a mortgage are whether you have the income to cover the monthly payments, your credit score and how much you already have saved for a down payment. Since each person’s situation is unique, a potential lender will be taking all aspects of your finances into account. Contact a bank to speak to a mortgage specialist who will be able to offer tips and advice tailored to your specific financial situation.
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