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We put all our expenses on a credit card and pay it off every month in order to get maximize our cash back. We never charge more than we have in the checking account, so we always pay it off. Should we reconsider doing this in order to improve our debt-to-income ratio?

Our goal is to be in the best position possible to get a mortgage in the next 3-12 months.

  • What is your goal? Are you trying to raise your credit score to get a loan? – mhoran_psprep May 24 '14 at 11:37
  • Even though you pay in full, the amount charged on the bill counts as usage. What percent of your available credit are you using each month? (On average) – MrChrister May 24 '14 at 14:50
  • I would say we are using no more than 10% of our available credit on average. – JHFB May 24 '14 at 18:31
  • Could I get some feedback on the negative vote? – JHFB May 26 '14 at 13:55
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For scoring purposes, having a DTI between 1-19% is ideal.

From Credit Karma:

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That being said, depending on the loan type you looking at receiving (FHA, VA, Conventional, etc), there are certain max DTIs that you want to stay away from. As a rule, for VA, you want to try to stay away from 41% DTI. Exceptions are made for people with sufficient funds in the bank (3-9 months) to go to higher DTIs. If you keep a 19% utilization overall, that will get you a higher score but it will also show that you have a monthly payment on a particular revolving credit account. While the difference between 729 and 745 seems like a lot of points, there are rules as to how the interest rates are determined. So you will find that many banks have the same or similar rates due to recent legislation in Dodd-Frank. In the days of subprime mortgages, this was not the case. Adjustable rate mortgages did not necessarily go away, the servicer just has to make sure that the buyer can weather the full amount once it reaches maturity, not the lower amount. That is what got a lot of people in trouble.

From "how interest rates are set":

Before quoting you an interest rate, the loan officer will add on how much he and his branch want to earn. The branch or company sets a policy on how little that can be (the minimum amount the loan officer adds on to his cost) but does not want to overcharge borrowers either (so they set a maximum the loan officer can charge) Between that minimum and maximum, the loan officer has a great deal of flexibility.

For example, say the loan officer decides he and his branch are going to earn one point. When you call and ask for a rate quote, he will add one point to the cost of the loan and quote you that rate. According to the rate sheet above, seven percent will cost you zero points. Six and three-quarters percent will cost you one point.

In our example, at 7.125% the loan officer and branch would earn one point and have some money left over. This could be used to pay some of the fees (processing, documents, etc), which is how you get a "no fees -no points" mortgage. You just pay a higher interest rate.

Where this scoring helps you is in credit card interest rates and auto loan and personal loan rates, which have different rate structures.

My personal opinion is to avoid the use of the credit cards. Playing games to try to maximize your score in this situation won't help you when you are talking about 20 points potentially. If you were at the bottom level and were trying to meet a minimum score to qualify, then I would recommend you try to game this scoring system. Take the extra money you would put on a credit card and save it for housing expenses. Taking the Dave Ramsey approach, you should have at least $1000 in emergency funds as most problems you encounter will be less than $1000. That advice rings true.

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The answer depends on how much you spend every month. The DTI is calculated using the minimum payment on the balance owed on your card. Credit card minimum payments are ridiculous, often being only $50 for balances of a couple thousand dollars.

In any case, when you get preapproved, the lender will tell you (based on your DTI) the maximum amount they will approve you for. If your minimum payment is $50, that's another $50 that could go towards your mortgage, which could mean an additional $10,000 financed.

It's up to you to decide if $10,000 will make enough of a difference in the houses you look at.

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    The op says they pay it in full therefore have no balance... – Kate Gregory May 25 '14 at 11:53
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    Yes, but that balance could still be reported to the credit bureaus, which means their credit report will still show a payment due. – Benjamin Chambers May 26 '14 at 2:25
  • Could you give me more details on what the minimum payment has to do with it? Particularly since we pay off in full? – JHFB May 26 '14 at 13:57
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    @JHFB When your statement cuts the balance due is sent to the CB, to get it to say 0 you need to pay in full before your statement cuts, then not use it for a few days until the 0 balance is reported. – VBCPP Jun 23 '14 at 22:24
  • @VBCPP - thank you - very helpful! Still wondering about the minimum payment - it is always zero. – JHFB Jun 24 '14 at 17:06
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If you pay it off before the cycle closes it will look like you have 100% available credit.

So if you credit card statement closes on the 7th pay it off on the 6th in full don't pay it when its due 2/3 weeks later.

Then after three months of doing that your credit score will go up based on the fact that your debt ratio is so low. That ratio is 30% of your credit score. It will help quite alot.

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    Zero Usage is worse than the 10% he currently has. 1-19% gets the best score for ratings' purposes. – JoeTaxpayer Jul 23 '14 at 21:24
  • @JoeTaxpayer: 10% aggregate or 10% individual? – Brian Jul 26 '14 at 12:51
  • Its not zero usage! Use it and pay it off before close. This works immensely well. To vote this down is just plain ignorant This is true statement. Check with clark howard if you do not believe me. If your statement reads $0 at close it will help your credit score, for sure – Mark Monforti Jul 26 '14 at 12:59
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    @staticx - Right, sir! That's the exception. A forthcoming article, as well. Any given card should also be under 50%, agreed. I was referring to the low end, one needs an aggregate 1% to avoid the 0% usage ding. – JoeTaxpayer Jul 26 '14 at 14:48
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    UPDATE - I see the Karma graphic @staticx posted has a 1-10, and 11-20 range. I'll agree that's probably right. I've not seen Karma show that granularity, as my article cites a Karma graphic with just 6 bands. Still, we agree, 0% is an issue. – JoeTaxpayer Jul 26 '14 at 14:54

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