Mortgage companies are happy to loan you money -- as long as they believe you will pay them back. The challenge for lenders has always been to use the tools available to them to make the best decisions about which borrowers are the safest risks. To do that, they evaluate loan applicants based on income, debt, credit score, bank accounts, and any other data they can legally ask for.
It's an inexact science, which means limitations in the process sometimes means borrowers who would probably pay a lender back in a timely fashion get denied, while some bad risks slip through the process and get approved. Mortgage companies work from limited data: A credit score says a lot about a person's history of paying back their debts, but it does not present a complete picture.
Now, two of of the three major credit rating agencies have made a big change to the information they share about how prospective borrowers pay off their credit card bills each month, and the third is expected to follow suit. The result will be a report that paints a truer picture of how people handle their credit card balances. And it's a change that anyone who plans to apply for a mortgage ought to factor into their financial behavior in advance.
How you pay, not just if you pay your credit card bills, can now impact whether you get a mortgage. Image source: frankieleon, Flickr.
What has changed?
Traditionally, lenders only looked at whether a consumer made his or her credit card payments on time. What they could not see is whether a loan seeker paid the minimum balance or the entire amount owed each month. That's an important difference, and one that can imply a lot about how a person treats debt and credit.
Under the new system, the Associated Press reported, mortgage lenders can now see at not just whether or not you pay on time, but whether you make the minimum payment, pay off your full balance, or somewhere in between. In theory, that means that people looking for loans who pay their balances off in full each month could have an edge in getting approved.
The data lenders see changed in September when Equifax (EFX 2.53%) and TransUnion (TRU 2.81%), began offering what's known as "trending data" and Experian is expected to follow. It's the first time in 30 years that the standard information provided to lenders has changed, Equifax told AP.
"Lenders now have access to a more comprehensive view of a borrower's debt management habits, specifically how much someone paid off each month on those accounts over the past two years," according to the AP.
What can you do?
Banks, credit unions, and other lenders won't necessarily start checking this information as a part of their standard review processes immediately. If you are about to apply for a loan, there's nothing you can do to change your history, but you should at least pay off any credit card balances you have now.
If getting a mortgage is something you plan to do in the future, it makes sense to start paying off your credit card balances in full -- or at least, as close to full as you can manage -- each month. That's a smart practice anyway since it saves you money on interest charges, but going forward, it could be the difference between getting approved or denied for a loan for borrowers who are right on the line.
