When you’re preparing to buy a home, several financial factors come into play, one of which is your credit utilization ratio. While you may be familiar with the importance of your credit score, understanding and managing your credit utilization ratio is equally vital. In this blog, we’ll explore what credit utilization is, why it matters to homebuyers, and how to keep it in check for a successful home purchase.

What is Credit Utilization Ratio?

Credit utilization ratio, often referred to as CUR or credit utilization, is a significant component of your credit score. It represents the percentage of your available credit that you’re currently using. To calculate it, divide your outstanding credit card balances by your total available credit limit and multiply the result by 100.

Why Does It Matter to Homebuyers?

1. Impact on Credit Score:
   • Your credit utilization ratio has a direct impact on your credit score. High credit utilization can lower your score, while a lower ratio can positively affect it.
   • Lenders use your credit score to assess your creditworthiness when you apply for a mortgage. A higher score typically results in better mortgage terms and lower interest rates.
2. Debt-to-Income Ratio (DTI):
   • Lenders consider your DTI, which includes your monthly debt payments, when evaluating your ability to handle mortgage payments.
   • High credit card balances can increase your DTI, potentially affecting your mortgage approval.

How to Manage Your Credit Utilization Ratio:

1. Keep Balances Low:
   • Strive to keep your credit card balances low relative to your credit limits. Ideally, your credit utilization should be below 30% to maintain a healthy credit profile.
2. Pay Balances on Time:
   • Pay your credit card balances on time to avoid late payment penalties and maintain a positive payment history.
3. Avoid Closing Old Accounts:
   • Closing older credit card accounts can reduce your available credit, potentially increasing your credit utilization ratio. Keep old accounts open to maintain a longer credit history, even if this seems counter intuitive.
4. Request Credit Limit Increases:
   • Consider requesting a credit limit increase on your existing credit cards. This can increase your available credit, which can lower your utilization ratio.
5. Monitor Your Credit:
   • Regularly review your credit reports for inaccuracies or discrepancies that could negatively impact your credit utilization. Be careful when disputing entries.  This can lower your credit score.
6. Pay Down High-Interest Debt First:
   • If possible, focus on paying down high-interest credit card debt first to reduce your overall credit utilization.
7. Avoid Opening New Credit Accounts:
   • Opening new credit accounts in the months leading up to your mortgage application can impact your credit score and potentially your ability to secure favorable loan terms.

Your credit utilization ratio is a crucial factor in the homebuying process. It can significantly influence your credit score and your ability to secure a mortgage with favorable terms. By managing your credit responsibly, keeping credit card balances low, and maintaining a healthy credit profile, you can improve your chances of achieving your homeownership goals and securing the mortgage that’s right for you.  We look forward to walking with you on this journey.