How Responsible Credit Card Use Can Improve Your Mortgage

Your ability to obtain a favorable mortgage is affected by dozens of factors, from your payment history to credit card balances, employment status, and more. Here are four ways that responsible credit card use can help you get a better mortgage.

1. Display a Low Debt-to-Income Ratio

The term debt-to-income ratio (DTI) can be a little confusing; it doesn't actually compare your monthly income to your entire debt but rather to the minimum payments you're required to make on that debt. Using your credit cards sparingly and paying them off each month helps you keep this number low.

Mortgage lenders like to see a relatively low debt-to-income ratio, since taking on a mortgage increases your required debt payments, and they don't want you to fall short.

A high DTI may make you less likely to get approved for a loan. On the other hand, keeping your DTI ratio low can help you qualify for a more desirable loan, perhaps with a lower interest rate. An ideal DTI is 36% or under.

2. Prove You Can Live Within Your Means

One factor lenders look at is whether you make enough money to feasibly pay your mortgage payments. But just as importantly, they want to know that they can trust you to put that money toward debts rather than spending your paycheck elsewhere as soon as it hits.

If you have credit cards that are reported to the credit bureaus, the company can look at the records and see a strong, reliable history of living within your means and fulfilling your debt obligations. But this will only happen if you use your cards responsibly. Be careful never to run up a card balance so high you can't make the minimum payments.

Credit card payment history can be especially important if you don't have other lending accounts like mortgages or car loans to build credit history.

3. Increase Your Credit Score

Although your credit score isn't the only thing mortgage lenders consider, it is a factor. A great score can improve chances of obtaining a better mortgage interest rate. One benefit of credit cards that you pay off every month (or keep a low balance on) is that they can really raise your credit score over time.

However, this doesn't mean that applying for a bunch of credit cards will give your score a quick boost. Just the opposite: applying for new credit cards dings your score slightly for a year or two, so spread out your applications over time to avoid too many dings in a row.

A credit card that you use responsibly does actually raise your credit score over time, especially if you keep your balance low. One of the factors in credit score calculation is how high your revolving balances (including credit cards) are compared to their limit. Keeping the card's balance under 10% of its limit is ideal.

4. Show You're Committed to Long-Term Reliability

A mortgage can go on for fifteen or even thirty years, so your mortgage lender will want to know that you're reliable not just now but long-term. The longer you've had your credit card, the further back a lender can look. They can see that you responsibly made payments five or even ten years ago and that responsible money use isn't just a phase.

These are just four ways that using your credit cards responsibly can demonstrate your creditworthiness to lenders so you can obtain a better mortgage. A mortgage with lower interest rates could save you thousands of dollars over time, so using your credit cards responsibly could be even more important than you thought.

Cornerstone Residential Mortgage can help you find the ideal mortgage lender for your credit situation and your mortgage needs. Your home's mortgage will be with you for a long time, so you should spare no effort in finding the right one. Get in touch today to learn more about how we can help you find the best mortgage.