One of the MAIN things that goes into the house buying process is your credit score. A lot of people don't know their credit score, or if they do, it's been a while since they looked at it. The reason this is such a big deal is because it has to do with how "risky" you are as a borrower. When a bank loans you money, they want to make sure you will pay it back! They way they can know that is if you have a good credit score or not.
When I first started working at Stewardship Mortgage, I thought that you just needed to pay all your bills on time in order to have a great credit score. I didn't realize that if you owed a lot on your credit cards, that would negatively impact your score! In fact, 30% of your score is determined by how much you owe compared to what your credit limit is. For instance, if your credit card max is $1000 and you owe $900, that will have a negative impact on your score!
One of the things I love about my job is creating a plan for someone as they are thinking about buying a house. A lot of times, they have a good, but not great, credit score. A LOT of what is holding them back usually has to do with their credit card debts. When you think about buying a house, it's more than just the down payment and getting a good monthly payment, you want to make sure you have a high credit score so you can get a better interest rate (which will lower that monthly payment).
It may sounds obvious, but a lot of people don't realize that having high credit card balances is hurting their credit score. Even if you are making the monthly payment, you still need to lower that balance! If you are carrying a high monthly balance on your credit card, you might as well be chucking money down the toilet because of that interest rate. Pay that card off, increase your credit score, and start saving for a down payment!
Finally, some people would advise cutting that card to pieces, closing the card account, and moving on. You want to be careful when you do that. The reason is that banks want to see that you have a few open lines of credit. Once that card is paid, just use it for gas or coffee, something small. Be disciplined in your spending.
Paying off debt is AWESOME! As you are making your budget, try to put more and more money towards paying off your debt, especially the debt with high interest rates.
As always, if you have questions about buying a house, please let me know! It would be my honor to help you :)
- Brian
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