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:
“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!
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Leana is the owner and 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.