Q: In your book, 100 Questions Every First-Time Home Buyer Should Ask, you mention that a lender will want to see all your current debts, including credit cards.
My wife and I are currently using one credit card to make most of our day-to-day purchases, so that we don’t have to constantly balance our checkbook. Prior to using this card (which has zero percent interest for balances), we would only charge around $200-$400 a month on our other credit cards, and pay off the balance in full each month.
Now, we generally charge around $2000 a month to it. We then use our checking account to make the one payment each month. We are running a $1,000 to $1,500 balance (again, at zero percent interest) and could very easily pay the card in full at any time.
We want to buy a house and are wondering if we should pay off the balance in full before talking to a lender. Since we regularly use this card, does this look like we will always have an outstanding balance on it based on its payment history? Will this affect us in a negative way?
Should we go back to using a checking account instead, and leave a zero balance on the card? Thank you for your time and sorry about the long-winded question.
A: Most of the time when people write in with this question, they’ve got a nice-sized balance in their checking account, but are paying anywhere from 3 to 30 percent interest on their credit card debt.
Clearly, you’ve got great credit. You have been offered a card with zero percent interest on it, so you are paying for your purchases over time and carrying a small balance on the account. And, you’ve got cash in your checking account which may or may not be earning interest.
If the cash in your checking account is earning interest, you’re coming out somewhat ahead of the game.
I say “somewhat” because carrying a balance can hurt your credit history and credit score, depending on who issued the card that you’re using. Some credit card companies report your balance as if you had maxed out your credit limit.
That probably hasn’t happened to you, but you’d be wise to pull a copy of your credit history from each of the three credit-reporting bureaus (you’re entitled to do this once each year for free from www.annualcreditreport.com) and then pay for a copy of your credit score ($5 to $7 at the same website depending on which credit score you choose).
Lenders are used to seeing credit card balances, and they can adjust for them. What happens is that the lender adds up how much you can afford to spend each month on your mortgage, interest and taxes. Conventional lenders allow you to spend up to 28 percent of your gross monthly income on these three items and up to 36 percent on your total debt.
If you carry a credit card balance, the lender subtracts your minimum monthly payment from the total amount of debt you can carry. The result is that you’ll qualify to get a smaller mortgage.
In your case, the lender might see that you have enough cash on hand to pay off the debt. And, you might not get “docked” for the way you’re handling your finances.
But my general feeling is that you’re talking about a thousand bucks. If you have the cash on hand, you should pay off your credit card debt and keep that slate clean.
Paying off your debts in full has obviously given you a high credit score. Carrying a balance, even at zero percent, can only hurt you.
Published: Feb 7, 2007