Buying a house is probably the biggest purchase you will ever make in your lifetime (unless you end up buying buildings in Manhattan). When you’re purchasing a house and applying for a mortgage it is also the most important time for you to make sure your credit score is at its best. The better your score is, the better interest rate you will get on the mortgage loan. A better score may result in saving you thousands of dollars in interest.
In this post, I want to address a question that I am asked very often: How long before applying for a loan should I not open or close any credit cards?
Opening a new credit card can affect your score
Ten percent of the Fico credit score calculation is a category known as “new credit”. Every time you apply for a credit card or any loan, the bank will always make a credit inquiry. Every time a credit inquiry is done, your score will go down by a few points. Although many credit inquiries can damage your credit for as much as 12 months, if you have only 3-5 credit inquiries the effect will only last for 2 or 3 months, and after that your score will basically be back to where it was. Please note that a credit inquiry will affect your score regardless of whether you were approved or not.
There is another factor in which applying for a new credit card right before applying for a mortgage may affect your score. That is the new tradeline showing on your credit report.
When applying for a new card, Fico looks at it as if you’re trying to borrow more money from the banks, even though it could be that you’re only doing it to gain some great credit card bonus. Fico will still think that maybe the reason you’re trying to apply for a new account is because you may have lost your job etc., and you desperately need funds. That’s why they will lower your credit score for about six months. After the six month period, your score should no longer be affected by the new account.
So back to our question, how long before applying for a mortgage should I not open a new credit card? After understanding what we have discussed above, you probably will want to hold off from applying for a new credit card within the six months before applying for a mortgage, since in that period your score may still be lower as an effect from the new credit card.
Closing a credit card
In the past, I wrote a post about how closing a credit card may affect your credit score. You can read it here. There we just generally spoke about issues regarding your overall credit, but if you know that you will be applying for a mortgage in the next six months, I would never recommend closing a credit card. Even the slightest effect on your credit score can end up costing you a lot of money in interest.
It's not only credit cards
It’s not only a new credit card that should be held off about six months before a mortgage. Any loan, for example an auto loan or car lease, will also have an affect on your credit score. So if you’re under contract and you need to close shortly, always consult with your mortgage broker before you apply for a new credit card, take out a new lease, or apply for any new loan (this is besides the point that new debt can impact your income/debt ratio and cause you to unqualify for the loan).