If Buying a house soon, don't open a new charge card

By
Real Estate Broker/Owner with Texas Five Star Realty, Plano Texas

If you are buying a house soon, don't open a new charge card

Example of how opening a new charge card before and during applying for a mortgage loan can hurt you.

Let’s say you are in the market to purchase a home sometime soon. You currently have two credit cards MC and Visa for 10 years and 8 years, respectively. You have good history of payments with large credit lines of $5,000 and $10,000. Your current balances on these two credit cards are $1,000 and $2,900 respectively. You had no inquiries for opening a new card in last two years or so.

 

We have the following table summaries the information showing everything is within the guidelines and are OK.

 

 

Impact Credit Score

Credit Card

Credit Line

Current Balance

Amount Owed/ Credit Line %

Length History
Years

Inquiries
Since Last Year

No. of

Cards

Card#1

$5,000

$1,000

20% OK

10 OK

0 OK

1

Card#2

$10,000

$2,900

29%OK

8 OK

0 OK

1

Total/Avg.

$15,000

$3,900

26% OK

9 OK

0 OK

2 OK

 

Now you are in a store looking at a beautiful couch that you fall in love. It is on sale for $1,500 but if you open a store charge card you could get additional 20% off, bring it down to $1,200. You cannot resist and open the new charge card to purchase the couch. You will be given a credit line of $1,500 with interest rate of 18%. Your Balance or purchase with Tax is $1,300.

 

The new Table will be as follow:

 

 

Impact Credit Score

Credit Card

Credit Line

Current Balance

Amount Owed/ Credit Line %

Length History
Years

Inquiries
Since Last Year

No. of cards

Card#1

$5,000

$1,000

20% OK

10 OK

0 OK

1

Card#2

$10,000

$2,900

29%OK

8 OK

0 OK

1

New Card

$1,500

$1,300

86.7% Not OK

0 Not OK

1 ?

1

Total/Avg.

$16,500

$5,200

31.5% Not OK

6 Reduced

>0 Reduced

3

 

As you see just by opening a new charge card, a couple of areas go outside of the boundries, as shown with red and yellow colors, and have negative impact on credit score. This could cause higher interest rate which in turn cost a lot more for the purchaser at the end.

Conclusion:

Again, if you are buying a home sometimes soon, don’t be tempted to open a store charge card to receive discounts. Though, these discounts can be huge, sometimes up to 25% of your purchases on the first day, however, this new card could cause your credit score goes down for the following reasons:

·The Ratio of (Amount Owned) / (Credit Line) for the new card as well as total accounts goes up.

·Average Length of your Accounts history goes down

·Number of Inquiries in the last year or so goes up

·Number of Credit Cards on hand goes up

To find out more about your credit score and how to get a free copy of your credit reports, or find out about credit scores in general and tips on how to improve your credit score, please read the appropriate articles from following web pages:

What is a credit score,

What makes up a credit score, Tips on how to improve their credit score,

What impact they have on your Interest rates & why they are important,

List of Do’s and Don’ts they should do before applying a mortgage loan,

List of Do’s and Don’ts after being approved for a mortgage loan. and

How Long Do I Have To Wait After Foreclosure or Bankruptcy

 

Contact us about your Credit Score Questions

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Location:
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Groups:
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Tags:
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Rainmaker
1,194,485
Wallace S. Gibson, CPM
Gibson Management Group, Ltd. - Charlottesville, VA
LandlordWhisperer

My sister is closing on her FOREVER home today and she needs a NEW CAR which has been delayed for over a year so she would have good credit

Apr 21, 2013 07:36 PM #1
Rainmaker
315,366
Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

Good job. She needs to buy the car soon after she closes the house deal. In this case, the mortgage loan most probably not reported to credit bureaus yet and she can get a great rate for her car too.

Apr 21, 2013 09:08 PM #2
Rainmaker
442,482
Rob Spinosa
Guaranteed Rate, Marin County, CA - San Anselmo, CA
Vice President of Mortgage Lending, Marin County
This is a great visual depiction of the advice we are reminded so often is vital. You can never assume the homebuyer understands this, or will practice it. And it sure seems like every time I forget to remind him/her, it happens again. Great post and congrats on the feature.
Apr 21, 2013 11:56 PM #3
Rainmaker
1,082,554
Lorrie Semler, REALTOR® in the Dallas area. Call/text 972-416-3417
United Real Estate - Addison, TX
Real Service. Real Results. Real Estate

Way to go on the featured post, Bahman! It was great meeting you at the Active Rain meetup lunch earlier this month.

Apr 22, 2013 01:08 AM #4
Rainer
139,841
Ridhi Raheja
Movement Mortgage (Illinois) - Naperville, IL
FHA, 203k, VA, Jumbo, PreApproval, Jumbo Home Loan

Good information for those who are planning to buy a house.Great post! 

Apr 22, 2013 01:26 AM #5
Rainmaker
231,074
Helen and Larry Prier- Re-Max Gateway - Residential Real Estate
RE-MAX Gateway- Residential Real Estate Sales - Anacortes, WA
Anacortes & surrounding Skagit & Island Counties

Great Post. I would like to send this to one of my clients, What is the deal with opening a SECURED Credit card. How does that help??

Apr 22, 2013 01:44 AM #6
Rainmaker
315,366
Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

Rob, thank you very much for your comments, yes you are right and it had happened to my clients too. Though I have told her about this, she could not resist on 20% discount all day and opened a new charge card. It stays with her for a while.

Apr 22, 2013 02:11 AM #7
Rainmaker
315,366
Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

Lorrie, It was nice meeting you at the Active Rain meet up too. Hope to see you regualry and more often.

Apr 22, 2013 02:12 AM #8
Rainmaker
315,366
Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

Ridhi, the soon to become homeowners really need to follow this advice. Thanks.

Apr 22, 2013 02:14 AM #9
Rainmaker
315,366
Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

Hellen & Larry, thank you for your comments and finding this article usefull that you want to share with your clients. About Secured Card: Secured card usually is offered to those that don't have great credit and usually they put some money down as collateral. Then creditor issued a caed witl limit of the secured deposit. Usuall this is a low credit line and most of the time any charges causes the ratio of amount owed to credilt line goes beyond 30% which is not good.

Conclusion, if you are buying home soon, don't open a new card, including and specially secured card.

Have a great day.

Apr 22, 2013 02:20 AM #10
Rainmaker
502,606
Lora "Leah" Stern 914-772-4528
Coldwell Banker, 170 N Main Street, New City NY 10956 - New City, NY
Real Estate Salesperson

Bahman, great visual of how opening a new crdit card negatively effects your credit worthiness.  Too many buyers, excited about their new home, go out to purchase furniture and other big ticket items for their home and don't realize that they are effecting their creit and incoe to debt ratios by doing so.

Apr 22, 2013 04:15 AM #11
Rainmaker
315,366
Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

Lora, unfortunately that is true and many home buyers tempted with good deals and discounts and fall in that trap. Specially after they become approved, while the purchasing house has not been completed (closed), they think they are done and go purchase large items that affects negatively on their score when the lender runs a new reports on them a few days prior to closing. Anyhow, have a great day.

Apr 22, 2013 05:10 AM #12
Rainer
80,169
Jennifer Spanbauer Brodoway
Lethbridge Real Estate.com - Lethbridge, AB
just call jen

Great advice for any homebuyer.  I've seen a few deals wrecked by new car purchases.

Apr 22, 2013 06:25 AM #13
Rainmaker
315,366
Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

Jennifer, yes I have seen it too. Thanks and have a great day.

Apr 22, 2013 08:14 AM #14
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Rainmaker
315,366

Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055

Homes for Sale in Plano, Frisco, Prosper, Allen TX
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