When you apply for a mortgage, the lender looks at four major factors in deciding whether or not to lend money to you. It wants to ensure that you have enough income coming in to make the loan payments and enough other money to be able to support your ability to pay in case your income hits a snag. The lender looks at the value of the property to see if it can support the loan. Finally, your creditworthiness gets considered, and your credit card limits can come into play. Usually, higher ones help you.
Your Credit Score
All of the details of your credit accounts and how you use them get listed on a document called a credit report. Three different companies -- Equifax, Experian and Transunion -- maintain reports on you that may have slightly different information. All of the data on those reports gets summed up into a three digit number called a credit score. Typically, lenders look at your three scores -- one per bureau -- and make their decisions off of the middle one. If your score isn't high enough, you don't get a mortgage, but the higher it gets, the lower your interest rate might be. High credit limits can help you get a better score, making your application more attractive.
One of the largest components of your credit score is your utilization rate. To calculate your utilization rate, the algorithm divides your total credit card debt by your credit limit. If you have $1,000 in credit card debt and a $2,000 limit, your utilization is 50 percent. However, if your limit is $4,000, your utilization would only be 25 percent. While gauging which level of utilization is best is an inexact science, one rule of thumb is that you're much better off staying below 30 percent, and the lower you get from that point, the better off you are. Generally, low utilization improves your credit score and makes it easier for you to get a mortgage.
One way to solve utliization problems is to get more credit. However, applying for more credit cards can damage your credit score in two ways. First, the more times your credit report gets pulled in conjunction with an application, the lower your score can go. Second, applying for lots of credit at once can be interpreted as a sign of financial trouble and have additional negative effects on your score. The way around this problem is to work with your existing card issuers by asking if they will increase your credit card limits. Doing this doesn't require you to make an application but will still lower your effective utilization.
A Better Solution
There's an even better way to lower your utilization than having your credit limits increased. Paying down your credit card balances can solve two problems at once. For instance, if you owe $1,000 out of a $2,000 limit and pay it down to $500, your utilization will drop to 25 percent just as if you had increased your limit to $4,000. At the same time, you'll also be saving yourself from paying interest on the debt. In addition to saving you money, it may also make it easier to qualify for a mortgage, since your lender will look at your total payments when determining whether or not to give you a loan.
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