Mortgage Hack: Revolving Credit 101

Mortgage Credit Hack – Revolving Credit 01

One of the first questions we get as independent mortgage brokers is always, “How can I increase my credit score? I’ve got some bumps on my credit. I’ve got this issue, or that issue.” So, today we’re just going to talk about one piece of that: Revolving Credit.

What is Revolving Credit and Why is it important?

The term “revolving credit” just means credit card. It could be a line of credit, MasterCard, Visa, Discover, American Express, or department store credit cards. Any kind of credit card that you have in your wallet is considered revolving credit, and affects your score when you apply for a home loan.

So, it may seem obvious, but the first thing you need to do is make sure that you don’t have any late payments. A week late, or a few days late isn’t going to be a huge problem. The credit bureau and the scoring system determines this part of your credit score on any payments made more than 30 days late. So, you want to make absolutely sure that you never make any payments after the 30 day billing cycle ends. That’s a large part of your score, it’s very important.

The second thing a lot of people have a problem with is the lack of credit. A lot of the time low credit scores are derived from not having enough, or any credit at all. Some people have no departments store cards, no Visa, no MasterCard. A lot of people don’t have cards because they don’t want to get into debt. Not having any at all, however, is worse than having a lot of them.

The reason for this is because about 1/3 of your entire credit score is determined by revolving credit. So, if you don’t have any revolving cards, your scores are going to be naturally lower than somebody who has several. So, you need a card, and we’ll cover how to get one in our next Sunset Sunday video.

Finally, and this is the one that gets everyone confused, is the credit limit versus the outstanding balance. What do we mean by that?

As an example, let’s use some round numbers. Let’s say you have a credit card with a $1,000 limit. You get the card, and you go and charge it up. Every month you max it out and pay it off.

Well, a credit score is a snapshot in time. So, whenever we poll the credit bureau, whatever your balance is at the time of that pull will reflect in your immediate credit score. If we pull on the 15th and your balance is $600, your score will be different than when we pull it on the 30th and you’ve paid it off. In essence, your credit score is kind of a moving target. To combat this we suggest, about 30-60 days before you apply for a major credit line, try and pay your balances off completely, and keep them paid off.

If you can’t quite pay them off, use what’s called the “30% Rule.” We would like to see that your outstanding balance is approximately 30% or less of the credit limit. Using our example, with a $1,000 limit, you don’t want a balance any higher than $333 at any given time.

Making your payments on time, never more than 30 days late, establishing enough credit, and keeping balances below 30% of your credit limit will ensure the highest possible credit score for any particular credit card, which makes up about ⅓ of your total score.

As always, if you have any specific questions about your mortgage needs, you can call Dean, Jenny or Dana at Sunset Mortgage of Alabama; 251-644-6188.
We’ll be standing by to help bring YOU home!

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