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Currently I am renting and would like to purchase a house in the next 5 years. I currently have a car loan and student loans that I am paying, but I would like to pay those off before I buy a house so that I can just focus on saving up for a 20% down payment. However, if I pay off all my debt then would that impact me trying to get a mortgage in 5 years since I would have no current debt, even if I have 20% down payment?
Would it be smarter to just make the minimum payments so I can keep my credit good, while saving at the same time? I ran the numbers and with either method I would be buying a house at the same point in time. It would feel good to be debt free but I don't want to screw myself over if it means that my credit score is going to drop.
We pay off our credit cards in full each month and we had no debt other than the 6 or so credit cards. It didn't hurt us a bit when we applied for our mortgage. We were able to get a loan with no points and at the lower end of the rate scale.
...I would like to pay those off before I buy a house
so that I can just focus on saving up for a 20% down payment.
regardless of anything else going on...
paying off debt is almost always the best thing to do.
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I would have no current debt, even if I have 20% down payment?
This is *NOT* a bad thing.
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Would it be smarter to just make the minimum payments so I can keep my credit good, while saving at the same time?
You have a fundamental misconception here.
You will still have credit/debt...
all those utility companies, and using the VISA, and probably a car loan etc
but most of this credit will on a 'revolving" basis.
These accounts and such let you get to show (every month!) that you are responsible.
Use the credit you have available... but pay it off every month.
When the times does come to buy... your DTI, cash reserves (for down and closing etc),
and the stability of your employment is what will matter. You're doing well on all fronts.
hth
Last edited by MrRational; 10-22-2011 at 04:28 PM..
Remember that even when you are not carrying a balance on a credit card, do not cancel the card. Keep it and charge on it a couple of times a year, remembering to pay it off in full. The idea is to increase your credit availability. You lose that if you cancel the cards. We have more cards than we need, one of them we use once a year. Since we never charge what we don't have the funds for already saved/budgeted, it's just a matter of remembering to use the card instead of cash.
Remember that even when you are not carrying a balance on a credit card, do not cancel the card. Keep it and charge on it a couple of times a year, remembering to pay it off in full. The idea is to increase your credit availability. You lose that if you cancel the cards. We have more cards than we need, one of them we use once a year. Since we never charge what we don't have the funds for already saved/budgeted, it's just a matter of remembering to use the card instead of cash.
I don't have a credit card though. I had 3 when I was young and just out of high school and was irresponsible with them. It took me a good 5-6 years to finally pay them all off and once I did I cancelled them. Would you suggest getting a credit card to increase my available credit?
I don't have a credit card though. I had 3 when I was young and just out of high school and was irresponsible with them. It took me a good 5-6 years to finally pay them all off and once I did I cancelled them. Would you suggest getting a credit card to increase my available credit?
yes, you probably should. It helps building up your score and available credit. They are also looking at how old those accounts are, and by the time you apply for mortgage, it has to be at least one year old - precisely to show that now you CAN be responsible.
I only had 1 older credit card (plus one a few months old, opened just for credit purposes), and had to prove non-traditional credit by letter from landlord, utilities company, etc. But it's more pain in the rear that way, and less impressive. Best to have 3 older accouns open, some revolving and some installment-type. I had to get a secured loan just for the history of having it. But my score went up 30 points with that and a new card.
So, I would not pay ALL debt off, but definitely a majority of it.
you have it backwards...if you pay your debts off your credit score RISES not drops! Your % utilization drops and a low utilization results in a higher score!
you have it backwards...if you pay your debts off your credit score RISES not drops! Your % utilization drops and a low utilization results in a higher score!
that's how I was advised at my banks and it really did help!
...if you pay it ALL off, the loan closes and the available credit it gave drops off from the ratios. That's why I said pay off most but not all... speaking of the same thing, aren't we?
...if you pay it ALL off, the loan closes and the available credit it gave drops off from the ratios. That's why I said pay off most but not all... speaking of the same thing, aren't we?
Use it and pay it off every month and you will continue to have a utilization rate of > 0% and your credit will not fall.
Last I checked
> 0% = A.
= 0% = C.
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But my score went up 30 points with that and a new card.
