I have a very good, if somewhat limited, credit history. I have a credit card in my name that has always been paid on time. I’m about half way through paying off my first car loan, there have not been, nor will there be, any late payments on it, either. I’m looking to buy a home in the 3 to 5 year time frame, and would like to ensure that my credit is as excellent as humanly possible by that time.
I have two questions related to optimizing my credit rating:
My credit card provider persists in increasing my credit limit every 4-6 months. It’s up to $7300 these days, from $5500 just over 2 years ago. I have never charged more than $500 on the card in a single month, so clearly I don’t need a limit that high. I’m concerned about the appearance that I have a lot of available credit, as I’ve heard that appears risky to potential creditors. Are the limit increases a good sign that my card company trusts me or a bad sign because it means more available credit? If the latter, would it make sense to request that they stop automatically increasing the limit and/or requesting that they actually lower the limit?
When I last received a copy of my credit report (in April), the comments indicated a) I could benefit from more variety of credit products, like getting a retail card and b) there were some recent checks that were counting against me. Those last checks related to the purchase of my car in August 2001. Prior to that, there were some from early 2001 (getting the credit card). So getting a retail card would help (a) but would presumably generate a check that would start the clock on (b) all over again. Do they cancel each other out, or is one more attractive than the other?
Credit checks only stay on your report for 2 years. I believe their negativity begins to decrease after 1 year, so there’s plenty of time for you to get that retail card and have the inquiry itself completely wiped off before you’re ready to buy that house.
The high available credit on your current card will probably help more than hurt, as long as you never use more than half of it, always make your payments, and have enough income to cover the payments if had maxxed it out. The longer you have that high of a limit and show you haven’t used it, the better it will be for you. What really scares lenders is when you get something with that high of a limit shortly before you go applying for other loans.
When you do go apply for that loan, don’t use any credit, even cards you already have, until the loan closes. Well, using an exisiting card probably won’t hurt if you’re making payments large enough to keep your outstanding balance from increasing. I know a couple people who signed deals to buy a house, applied for the loan and were approved, went out and bought furniture and things on credit, then couldn’t get the house because when it came time to close the loan they had this new debt that affected their credit scores and debt-to-income ratio. One guy was able to borrow enough money from family (had to get them to sign something calling it a “gift” first) to pay off the new debt and get his debt-to-income ratio back in line. The other had a borderline credit score to begin with, and just couldn’t get the house.
jacquilynne - I’ve been going through a very similar situation, so I’ll share what I’ve learned.
One of the factors that go into your credit rating is percent of credit used. I know you said you try not to, but if you have a balance on your credit card, having a high limit is better because you will be using a less percentage of your available credit.
Next, if you could pay just a little extra on your car payments each month, maybe get yourself a month ahead of schedule, that will also factor into your final score. cstamets also gave good advice about not using your available credit just before, or during your mortgage application.
Also keep in mind that things like getting a cell phone, or signing up for a gym membership sometimes, if not always, require a credit check. So if you plan on doing these things, or something that you might suspect requires a credit check, get them out of the way at least a year before trying to get your home loan.
Types and amounts of credit will greatly affect your credit score. If you are going to buy a house in that time frame (3-5 years) then having a retail card and maybe a jewelrey card and a furniture store card will show that you have recieved more respect in getting credit. However, be forewarned that too much revolving credit or credit availability may be a negative. Point in case, I went to purchase a house but got my pre-approval amount downgraded due to the fact I had three credit cards with zero balance but an availability of $26,000 dollars cummulative. So, instead of getting a $100,000 dollar loan approved, I got $74K instead. Most lenders take this into consideration and when you go to get a house, get pre-approved by a few lenders to get best rates and amounts.
If you wait to buy your house in three to five years and don’t need that amount of credit, then get it lowered. However, remember that the most recent activity is what is taken into consideration.
Point in case, let’s say you don’t make a payment on a hospital bill you get today. The hospital’s bank eventually turns it over to a collections agency and it sits out there for 5 years as not paid. If you decide to buy your house then and looked at your credit, you would find it is there but doesn’t carry alot of wait behind your score. However, if at 4 years and 10 months you decide to “clean up” your report by paying it, the collection company’s item becomes haevy against your score due to recent activity.
Clarification: This is a “what if” to kind of show you about activity (timing) on a report, not to be construed as a “this is you.”
I personally try and keep my cards around $20,000 for emergency or traveling money and then pay them off. This came in handy when I needed to travel from Korea for a funeral.