Trying to get a home loan? You may want to consider paying off your credit card bill first. As a result of the latest change by major credit rating agencies, mortgage lenders are now able to examine whether you pay the balance of your bill on a monthly basis or keep a balance. Which means home buyers who repay their credit cards may earn an edge when looking for a mortgage.
A credit card’s impact on credit scores changed
Historically lenders reviewed basic information such as your total debt and whether you were on-time with your payments when deciding if they should make a home loan. However they didn’t know whether you were paying off your charge cards or other revolving debts completely or carrying a balance month-to-month.
That changed in September, when a couple of the major credit rating agencies, Equifax and Transunion, began offering what’s known as “trending data.”
Lenders now have access to an even more comprehensive view of a borrower’s debt management habits, specifically how much someone repaid each month on those accounts over the past two years. And they may reward individuals who regularly pay more than the minimum on revolving debts or pay them off completely.
The remaining credit reporting agency, Experian, is also expected to begin offering trending data soon. It is the very first time in 30 years that the standard information made available to lenders on credit reports has been updated, reported by Equifax.
The change was driven by Fannie Mae, the mortgage giant that guarantees many of the loans in the U.S. It found that all other things being equal, borrowers who repaid their credit card every month were 60 % less likely to become delinquent than borrowers who make just the monthly minimum payment. As a result, Fannie Mae will now regularly review these details to help improve its risk assessment.
The final decision on who gets the loan still remains with the bank or lender, who is able to decide whether or not they want to consider this factor.
Experts say that while it’s still early in adoption, Fannie Mae’s influence over the industry means they expect it to become part of the regular mortgage review process.
Fannie Mae, credit bureaus and other industry experts say they plan to use the additional information to increase the number of loans available, not to penalize those who do carry a balance.
“It’s going to benefit someone who is on the border today,” said Mindy Armstrong at Fannie Mae.
Consider 2 different people with otherwise equal credit profiles: Jack and Jill. Jack makes the minimum payments each month, while Jill pays her cards off in full. They can both have been “maybes” in the loan officer’s mind, but this factor could tip Jill into the approved pile.
“It’s just one factor of the risk assessment,” Armstrong said. “These are all things you can do put yourself in a better position.”
Your credit score and credit worthiness may ultimately be determined by many other factors – most importantly whether you pay your bills on time and exactly how much of your available credit you use. So paying down debts more aggressively could possibly have an added bonus of enhancing your utilization rate, and thereby your credit score too.