Pay down credit cards?

[bcdudley]

I am in the very early stages of getting a new house. We just sent over the contract a couple of days ago and have not even gotten an acceptance yet. The house I am applying for is $130k. I am going with a VA loan and asking the seller to pay $5200 ( a little more than I think we should be asking). The house is in excellent shape from what I can see, but no inspection yet.

I have 3 credit cards with with a max limit of $2500 and I am sitting at around $1500 utilization. I have around $7000 cash available that I pulled from my savings account. I am guessing I will need around $4000 for closing costs, inspections and whatever other costs come up, so I should have $3000 remaining afterwards. I am thinking I should pay down my credit cards to around 3% to help boost my score up a little higher before I get any further into this. The only thing is, My loan officer is telling me not to. She said underwriters like to see credit cards in use, so I should leave them where they are.

She seems very knowledgable about what she does, but my confidence in her credit rating and scoring knowledge is not as high.

[Anonymous]

IMO, having savings built up in your situation is stronger than having your balances paid down, and an increase of a few points.

If you are asking for closing costs to be paid by the seller, why would you need $4,000 to close? In this market, sellers are very often paying any and all closing costs for buyers, especially when using VA.

Good luck and Thanks for serving.

[MarineVietVet]

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@bcdudley wrote:

I am in the very early stages of getting a new house. We just sent over the contract a couple of days ago and have not even gotten an acceptance yet. The house I am applying for is $130k. I am going with a VA loan and asking the seller to pay $5200 ( a little more than I think we should be asking). The house is in excellent shape from what I can see, but no inspection yet.

I have 3 credit cards with with a max limit of $2500 and I am sitting at around $1500 utilization. I have around $7000 cash available that I pulled from my savings account. I am guessing I will need around $4000 for closing costs, inspections and whatever other costs come up, so I should have $3000 remaining afterwards. I am thinking I should pay down my credit cards to around 3% to help boost my score up a little higher before I get any further into this. The only thing is, My loan officer is telling me not to. She said underwriters like to see credit cards in use, so I should leave them where they are.

She seems very knowledgable about what she does, but my confidence in her credit rating and scoring knowledge is not as high.

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Your LO is less than correct. FICO scores both overall and individual accoint utilization plus the number of acounts reporting a balance at any one time. Right now your overall utilization is 60% (1,500/2,500). This is pretty high. I don't know what the individual utilizations are from the information you provided.

Since you seem to have the available funds this is what I would do but only you can make the final decision. Pay off 2 of your cards completely and pay down the third card to a very small amount. Even a few dollars is fine but anything <9% of it's credit limit will work.

Going forward from that everyone's situation is different and there is no one size fits all approach to this but what seems to work well for most people is to have only one of their cards report a small (<9% of it's credit limit) balance each month and then pay in full before the due date. You can use it as much as you want during the month but what's important is the reported balance because for most cards whatever is reported on the monthly statement is what is used to calculate utilization for the month.

You might have to play around with the percentages for a few months to see what works best for you. Some people say that 1-3% utilization helps the most. For others it might be 5-9%. As I said it's not one size fits all.

On any other cards always try and have them report a zero balance each month. That doesn't mean you can't use them just make sure that the desired zero balance on these accounts is achieved several days before their statements post.

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

[Anonymous]

I would disagree. Not that it would increase your scores, but to what end would you pay off those cards? If it raises your score a few points, would it be enough required to get a better rate? You should ask your LO if they have a "what if scenario" in their credit reporting. This can give you a good idea of what increase in your scores would result from paying down cards, and thus give you an idea of what rate savings you may achieve.

I have always told borrowers to keep money in reserves if at all possible. New home or old, there will be things they will want to do once they move in.  If it does not change your rate and you choose to not pay them down now, you can always pay down those cards after closing if you have no other need for those funds.

[bcdudley]

The only reason they are so high now is because I just got through paying my rent and the car payment on them. I typically pay them off within a couple of weeks and I had planned to do this anyway, but she had told me not to. I pay my rent and car payment via paypal on my credit cards so I can get the points built up faster.

My rent was $1000 and the car payment was $375. Add gas and other stuff and it is $1500. I hadn't really planned on purchasing a house at this time, but we came accross one we really liked and decided to go ahead.

I have 2 cards that are $1000 limit and 1 that is $500. I will go ahead and pay them down and leave maybe a $25 balance on the higher cards and $10 on the lower one. I don't want to pay the interest on them anyway. I can always pull more money out of my savings if it is needed.

Thank you both for the responses.

Edit: I do still have another $8k in savings on top of the $7k I pulled out. Not that I want to use it but it is available if needed. It just takes about a week to get a check cut and mailed to me.

Edit 2:"If you are asking for closing costs to be paid by the seller, why would you need $4,000 to close? In this market, sellers are very often paying any and all closing costs for buyers, especially when using VA."

Earnest money

Option Fee

Inspection

foundation inspecton

Appraisal

Survey

Title exam and insurance

VA Funding fee plus whatever fees come up. I have already had to cut 2 checks just to make the offer. The first for $1000 for the Earnest money and another for $100 for the option fee.

[MarineVietVet]

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@Anonymous wrote:

I would disagree. Not that it would increase your scores, but to what end would you pay off those cards? If it raises your score a few points, would it be enough required to get a better rate? You should ask your LO if they have a "what if scenario" in their credit reporting. This can give you a good idea of what increase in your scores would result from paying down cards, and thus give you an idea of what rate savings you may achieve.

I have always told borrowers to keep money in reserves if at all possible. New home or old, there will be things they will want to do once they move in.  If it does not change your rate and you choose to not pay them down now, you can always pay down those cards after closing if you have no other need for those funds.

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I understand completely the need to have reserves and you're right about that. My suggestions were meant to address the question by the OP as to what to do to raise their score a few points.

I guess I could have focused my comments more at the LO for saying that the OP shouldn't do anything with these balances and the apparent lack of understanding by the LO that carrying balances (which usually means paying interest) is not the only way to show use of credit cards.

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

[mauve]

I wouldn't pay the cards off unless you really do need a score boost.  60% utilization is high, and you could get a good boost by paying them down as MVV said, BUT you probably won't get an APR reduction out of it through the VA loan program, will you?  Ask your loan officer that.  She's right paying them down would boost your score, though.

[bcdudley]

The LO told me that my scores were fine. I am ok with the APR I am getting. I was just wanting to increase my scores so I would have a better chance of getting an approval. I went through a deal last year that fell through, so I am paranoid now that this one will fall through as well nd I am wanting to do everythign I can to increase my chances of success.

[austinguy907]

Well the only thing the improvement can do is lower your rate if you get a significant bump from paying things down.  I know PMI can be an issue if you're not within a certain bracket as well.  Just keep in mind you'll still have those payments after you close if you don't pay them off now too.  Sometimes it's just a good feeling knowing the only thing you'll have to deal with every month is the mortgage payments and utilities for at least the first couple of months.  But, do what's comfortable within your budget and you'll be fine.  They say once you go from the LO's desk to UW's desk you're in the clear to close almost 100% as long as any conditions / questions they have get promptly answered.

[bcdudley]

"They say once you go from the LO's desk to UW's desk you're in the clear to close almost 100% as long as any conditions / questions they have get promptly answered."

That was not my experience at all last year. I had my LO telling me they enitre time that everythign looked great. Sat on the underwriters desk for almost 6 weeks then got declined. Until I have keys in hand, I am going to be paranoid about the entire thing, probably for a few months afterwards as well.

As far as having the payments afterwards, I will pay them off immediately after I close since I wold have done that anyway. it was just a matter of timing.