Images by Getty Images; Illustration by Austin Courregé/Bankrate
If you’ve been using credit cards to cope with price hikes, you’re not alone. Since the Federal Reserve began raising interest rates in 2022, some consumers have maxed out credit cards or come close, according to Bankrate’s recent Credit Utilization Survey. That credit card debt could sink your chances of qualifying for a mortgage and buying a home — especially if you’re leveraging a lot of your available credit.
Can you buy a house with credit card debt?
To be clear, credit card debt doesn’t bar you from applying for a mortgage, and credit cards can help establish and build your credit history.
The key is to make payments promptly and avoid charging too much against your credit limit, a factor known as credit utilization. Credit utilization accounts for about a third of your credit score, one of the most important variables for mortgage lenders assessing your application.
The trouble happens when you spend too much on credit. That raises your credit utilization, which could hurt your credit score, increase your debt-to-income ratio (DTI) and prevent you from saving more for a down payment. Without a sufficient credit score, DTI ratio and down payment, you might not be eligible for a mortgage — or, you’ll qualify, but at a higher mortgage rate, costing you more in interest over time.
| Credit score minimum | DTI maximum* | Down payment minimum | |
|---|---|---|---|
| *The maximum DTI ratios vary depending on underwriting (automatic or manual), the lender, the borrower and other factors. | |||
| Conventional loan | 620 | 45% | 3% |
| FHA loan | 580 | 43% | 3.5% |
| VA loan | No minimum, but 620 recommended | 41% | None |
| USDA loan | No minimum, but 640 recommended | 41% | None |
Of respondents to the Bankrate Credit Utilization Survey who have maxed out credit cards or come close, 88% say it negatively impacted their personal finances in some way. This includes 41% who said their credit score declined.
Should you pay off credit card debt before getting a mortgage?
If your current credit score makes it difficult for you to land a mortgage, it’s best to pay down or pay off credit card debt before you apply. By using less of your available credit, you’ll lower your credit utilization, improve your DTI ratio and, eventually, up your score.
However, if your credit utilization isn’t very high and your minimum credit card payments are relatively low compared to other debt you might have, it could make more sense to focus funds on the other debt, or a down payment.
In either case, talk to your mortgage loan officer well ahead of applying for the mortgage. They can help you determine how to get in qualifying shape.
Tips to tackle credit card debt before buying a home
Here are some ways to improve your credit utilization, according to credit bureau Experian:
- Pay down credit card balances early. Credit card issuers usually report account balances to credit bureaus at the end of each statement period, but your bill isn’t due until several weeks later. Because of this timing, you might have a high utilization even if you pay your charges off fully on the due date. If possible, pay before the due date to help lower your utilization.
- Request a limit increase. Say you charge $2,000 a month to your card and pay it off every month. If your credit limit is $5,000, your credit utilization ratio can look a bit high, at 40 percent. If your issuer boosts your limit to $10,000, voila: Your ratio is down to 20 percent without any other changes in your financial situation. (One caveat: A credit limit increase might result in a so-called hard inquiry to your credit, which lowers your score temporarily.)
- Report that raise. Along with requesting an increase, be sure to update the financial information on file with your issuer, especially increases in income. If the issuer knows you have more coming in, that might prompt it to raise your credit limit.
- Don’t close old credit cards. You might be tempted to cut up old credit cards, especially if they carry annual fees or you’ve struggled with overspending. If you keep those cards open, however, you’ll have more available credit, which could help maintain a lower utilization and preserve the length of your credit history — another factor that affects your score.
- Open a new card. If you open a new line of credit, you’ll have more available credit overall. A word of caution, though: Don’t open a new credit card and then promptly max it out. In addition, don’t apply for a new card if you’ve already applied for a mortgage that hasn’t closed yet — that can create issues in underwriting, or even cause the financing to fall through.
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