Before Buying A Home, Look At Your Credit Score

Q: I am planning to apply for a home mortgage loan. I currently have a credit limit of $10,000 on a credit card with a $1,000 balance.

I am going to pay off the balance in full before applying for the mortgage. I have heard that having that much available credit does not look good to a lender. Is there a proper way to lower the credit limit on the card without it hurting my credit score?

A: You don’t want to limit the amount of credit on your card. What you want to do is manage the credit limit you have.

Right now, you have a $10,000 credit limit and a $1,000 balance. Basically you’re using up 10 percent of your available credit limit. That will have a positive effect on your credit history.

However, if you lower the amount of your credit limit, you’ll be using a higher percentage as your balance. That may have a negative affect on your credit score.

I don’t think most lenders will care about your $1,000 balance (although I think it’s a good idea to pay that off before you apply for your mortgage), and having a $10,000 limit isn’t overwhelming.

Lenders start to get concerned when someone has 5 to 10 credit cards, and each card has $10,000 to $50,000 of available credit. That would give someone as much as $50,000 to $500,000 of available credit if every card was maxed out.

Unless your income is $1 million a year or more, having $500,000 of available credit seems to be excessive.

But having $10,000 of available credit on one card seems reasonable. If you’re concerned, you can talk to a local mortgage lender to see how it would affect their decision to approve your loan.

A final thought: before you apply for your mortgage, be sure to pull a free copy of your credit score from annualcreditreport.com. At the time you do this, you’ll be offered the opportunity to pay for a credit score. At $6.95, it’s a good deal because you’ll really see how the way you are currently managing your debt is being perceived.