Right now many people are looking at purchasing a home, especially with the extension and expansion of the home buyer’s tax credit.    Sometimes they are unable to qualify for the home loan because of credit scores that are too low.  Christy Miller, a mortgage advisor with American Home Mortgage, said that a minimum score of 640 or better is needed to qualify for the majority of current mortgages.  She also said that the credit challenges many people are facing right now is that their credit card balances are too high.

The second largest part of the FICO score, accounting for 30% of it, is the “Amounts Owed” category.   Revolving accounts, such as credit cards, retail store accounts and fuel cards, fall into this category.  When your balance owed on the account is over 50% (half) of the credit limit, credit scores typically go down.  As the account gets closer to being maxed out, which is a balance near 100% of the credit limit, scores can be severely impacted.  Account balances of less than 25% of the credit limit are best to build good credit. 

EXAMPLE: A credit card with a $1000 credit limit should have a balance less than $250 to have a positive impact on credit scores.

The challenge many consumers are facing, Ms. Miller said, is that if they use their savings to pay down the credit cards, they may not have enough money left for the required down payment amount on their home loan. 

WHAT TO DO

If and when possible, pay down your credit card balances to under half of the credit limit for that account.  Then work toward getting them down to under 25% of the credit limit.  And do not close them when they are paid off!  They are an important part of a successful credit building plan when used as credit building tools.  Find out how to use your accounts to your credit advantage with your Credit Analysis from Complete Credit Services.

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