Last week my readers and I had an interesting discussion in the comments section of the post Using Credit Cards Does NOT Equal Being in Debt
One of them had this question:
“Nice post. I’m interesting in learning how Cheap Black Dad did with closing on a new house. We’re thinking about getting a better loan for our mortgage and I always hear that you have to stop using your cards for a couple of years (!!!!!!). Did he stop using credit cards?”
This is something that can be confusing. Get used to it, The Hobby is full of confusing concepts. In general, the advice is to stop applying for new cards for at least two years before you get a new mortgage. Why this number? That’s because when you get a new credit card, an inquiry is recorded on your credit report. And it stays there for at least two years. After that it drops off, and just like that, your sins are forgiven!
Inquiries can be perceived as a red flag and make lender think that you are overextending yourself debt-wise. Basically, you want your credit report as pristine as possible in order to get the lowest rate. You can continue using your existing credit cards and make sure you pay off balances in full each month. Basically, something you should always be doing anyway.
But what if you stop churning and six months later an amazing deal comes along. It’s a perfect house in a perfect neighborhood, and mortgage rates happen to be at an all time low. Is there any hope? Yes, there definitely is. Check this comment from Erik on the same blog post:
“I bought a new house about a year ago. It was somewhat unplanned in that we were casually looking and just happened to run across a good deal. I had many inquiries on my file and my wife probably had a few too (let me say that I don’t do “app-o-ramas”, I tend to get cards when I have a specific need and the bonus is attractive.
Also, I do very little MS, maybe picking up the occasional gc when there is a good deal but that’s about it). My existing mortgage was with a small local bank that only has a couple of branches. I went back to them because they have great rates and I had the existing relationship (plus I can walk into the bank’s head branch and sit down F2F with real humans).
Anyways…I was a little worried about all the inquiries plus the fact that we were moving out of the old house before selling it, meaning I would carry 2 mortgages until it sold. Sure enough, when the underwriter ran the loan he asked me why I got each account and I just answered truthfully. I think he got it when I said “I just returned from Australia and we flew business class. Had I purchased those seats, it would have been around $32K but using miles it cost me less than $600 total for the taxes/fees).” The mortgage was approved, no problem.
So…I guess the point that I’m making is that lots of inquiries aren’t an automatic kiss of death provided that you have a strong credit history, adequate income to support what you’re doing, and a good relationship with your banker. But the advice is sound…if you are actively planning to buy a house, it’s probably best to chill on credit card apps to make your credit history more attractive to lenders and qualify for the best rates (but continue to use existing cards and pay them off every month because they want to see that you are managing debt responsibly).
Never underestimate the power of relationships – this was a recurring theme at a recent miles/points meetup where people spoke about having good relationships with store managers, clerks, bankers, gift card vendors, airline employees, etc. as a key component of their miles/points strategy. There are still people who are empowered to make decisions – the computers haven’t entirely taken over.”
And here is the response straight form the horse’s mouth:
Cheapblackdad:
“1. Managing your credit card balances (not too high, not to low) is the most powerful short term thing you can do to improve your score. We got our score about about 40 points over the last few months playing the balance game.
2. We stopped applying for cards last September. We applied for 1 each in May/June of this year. We applied for our loan in September. I’ll go back and look, but I think when they ran us, we had 1 credit card app a piece in past 12, but probably like 5+ each past 24 months.
3. 740+ is the magic number. They’ll basically take the midpoint score provided the other two aren’t off too much. i.e. if you have a 742, 750, and 767, they’ll effectively call you a 750″
Well, there you have it. It is possible to get a good rate even if you’ve had quite a few inquiries on your credit report within the last 2 years. BTW I’ve seen more than one hobbyist relate a similar experience. But, I personally would never take that risk when it comes to something this important. So, I absolutely think you should stop applying for new cards if there is a decent chance you will need a major loan within the next two years. You never know if mortgage approval algorithm will change significantly, so it’s better to be safe than sorry. Look at the upside: You will finally be able to get that Chase Sapphire Preferred!
Click here to view various credit cards and available sign-up bonuses
Author: Leana
Leana is the founder of Miles For Family. She enjoys beach vacations and visiting her family in Europe. Originally from Belarus, Leana resides in central Florida with her husband and two children.
Sorry for the seemingly broken English in my recent post but text to speech does not always capture the correct use of a word or its true meaning… Without a editing feature I just left it as is
@BB No worries about the grammar! I didn’t even notice. I’m the last person to pick on spelling mistakes.
I’m a little late to respond to this article but at the same time how timely as I just went through refinancing of my home.
As was mentioned, mortgage loan officers/underwriters will pick the middle number of the three major credit bureaus FICO score to determine what interest rate that you will pay and what type of borrower they consider you.
First let me state about FICO credit score’s and mortgage applications; The FICO scores that you receive from your credit cards are nowhere close to being the numbers that will come up for your mortgage FICO score. There are much different formulas used for the mortgage FICO score. For example, The wife & I generally have 790-818 FICO vantage scores through our credit cards (i.e. Barclays, AMEX, Chase, Citibank, CapitalOne). But during our refinance (with at least 3 mortgage companies) we rcvd FICO mortgage scores between 765 & 789. Because we did our rate shopping in a 2-week window, all scores were the exact same, as reported by each of the individual credit reporting agencies.
To the mortgage underwriter, none of this matter as long as we were over 760. As long as we had an avg (middle score) FICO score above 760 we qualified for the best rates and were condsidered optimal borrowers. (So much for all my trying over the years to be in the 800+ FICO score group)!!
Now, as to the point in contention – credit card churning and mortgage applications…as long as you appear to be responsible and pay off your monthly balances in full, as others have mentioned the underwriter of the mortgage will understand that you are using credit to your advantage and doing so responsibly-which is the key they are looking for and granting a mortgage.
In my case, my underwriter wanted to know specifically what the last five months of credit card applications I had were specifically for. I truthfully answered that I was applying for those credit cards specifically for the hotel and airline mileage bonus programs. I also indicated that for each one I paid off the bill in full each month. Speaking of which, even though you may pay off your credit card bills in full every month, it does not exactly look that way on a credit report. A lot of my recent credit cards that I was completing minimum spend on had balances listed on them even though each one was paid in full every month before the due date. This was factored into my debt to income ratio overall but the bottom line was I do not carry other debt so therefore this was a non-factor overall in the end. It was slightly disheartening to know that even though I pay off my bills in full every month and that I have not paid interest on a debt, other than my mortgage, for the past 15 years that monthly balances show up on my credit report.
Bottom line – I churn a lot of credit cards for the bonus points and miles. I easily have over 20 inquiries on my credit report for the past two years. Playing the credit card bonus game responsibly has made me immune to any negative impact on my ability to obtain a mortgage refinance. I am just one example of how one may be impacted in applying for a mortgage and playing the credit card bonus game. I cannot speak for someone that carries a balance every month and pays interest to do so nor someone that has a 700 FICO credit score; your results will not be the same as my results.
If you have seen any of those commercials recently about people who have excellent FICO credit scores, and they know it, basically demanding favorable terms for what they are seeking credit for…I felt the same way in my recent mortgage refinance…I knew that my credit score was awesome and my responsible use of credit would far outweigh 20+ inquiries on my credit report!!
@BB Thank you very much for your comment! Glad things worked out for you. You are right, a good score is your best bargaining chip, and banks will usually compete to acquire you as a customer.
You brought up an interesting point. I actually knew that the balances are reported even if you make your payment in-full for that month. The amount is recorded as soon as the bank cuts the statement. That’s why many pay off balances before the closing date. I didn’t bring it up because I don’t really want to confuse people further, but this is an important fact. Probably deserves its own post. There are so many factors that affect your score, it can make your head spin. Interestingly, unlike you, I don’t want to have an 800 score. If I did, it would be a sign that I’m probably missing out by not applying for more cards!
BB, the feedback I got was 740+, but I have also heard the 760 # as well. Either way, congrats on everything working out.
To echo e’rrbody, having the appropriate credit score seems to be the ticket for making underwriters comfy with all the inquiries. Personally, I’d amend the rule to hold off on applying for 2 years, and change it to 1 year, and only for people who are first time home buyers (like me!), or have a shorter credit history, or some other event that makes them a bit nervous about the underwriting process. For a lot of the people doing refis, with good scores, my guess is business as usual is probably fine.
Also, BB’s point on balances is a key one. Balances are the most powerful short term (1-3 months) way of impacting your score 10-30 points.
@Cheapblackdad I actually agree with you on 1 year thing. That’s probably what I would do for my own situation. But, I would hate to give this advice to a new a reader. Guess who will be blamed if things go wrong? That person may come back and say I wanted commission and that’s why I told readers to apply away. I’m in a bit of a tricky spot, as you can imagine.
My husband had a career crisis in 2013, and we bought a new house in a new town at the beginning of 2014. We didn’t plan to move at all, and certainly didn’t plan for a new mortgage. I thought for sure we would have drama getting one since we had 30-35 credit cards (all with zero balances) at the time, plus at least 10-12 inquiries each. But nothing. No one even asked. We took out a 15-year loan with a rate of 3.25 (I think?). Our scores are over 800 and we are debt-free, so it didn’t end up mattering.
@Holly I’m so glad you got such a great rate! Many years ago, we got 6 percent, and it was considered extremely good. It appears you got a lazy underwriter, which worked out nicely. I can’t believe they haven’t even asked you about the inquiries! You experience just confirms what many have said: A good score is what makes or breaks a mortgage rate.
We had a similar situation. Husband got offered an amazing job in a new city, so we bought a new house with about 4 months notice. We had gotten 2 new cards a piece in the 6 months before we closed and had 16ish cards between us. No MSing though so our balances were low or 0. No one even asked about the number of accounts, but we have excellent credit scores and a good income. The only downside was that I had planned to cancel a couple of cards, including an AmEx gold, and couldn’t with the pending mortgage so I paid $250ish in fees. About a year later we also had to get a new car when ours died, and my husband was able to get a loan at the lowest rate even though he had 5 new cards in the 6 months before. Not sure if we were just lucky, but we managed to pull it off.
@Cmal1 Thank you so much for providing your experience! Congratulations on getting the best available rate. Honestly, I think it’s probably typical for that to happen as long as you have a good credit score to back up your application. That’s the biggest factor, I believe. Of course, we don’t know how things are going to be in the future, and that’s why it’s important for bloggers to caution readers. Some bankers will question you on inquiries, and not all will be as understanding.