One of our readers, Jennifer, sent us this question:
My husband has a credit score of 560 and it is low because there are 2 accounts that were slow pays and paid off and closed almost 5 years ago.
The problem is we are trying to get a mortgage and with his score it may be difficult. I have tried everything to repair the credit and nothing seems to work.
Since these bad cards, he has paid off 1 vehicle and has 2 car loans on his credit, which are paid for on time every month for 3 years now. He has a few open credit cards which we pay every month. The thing with those current cards is that we owe too much, not above the limit, but maybe only $500 under it.
My first question is: Since I have the money to pay off the cards we have now, do we do that and will it really impact his score?
I just want to know if it really helps. I feel if I pay off all of his debt, we won’t have any money left in savings to our house. It is about $10K in credit cards.
Jennifer, thanks for your question!
Yes it will absolutely raise his score if you pay off those cards – but you don’t necessarily have to pay off the full amount. If you could get those cards down between 20% – 30% of the total available credit then that will be enough to kick his score up some.
Just understand that it will take some time after you pay those cards down for his score to go up. You have to be able to show 6-12 months of keeping your debt under 30% with on-time payments to see the full benefit of your actions.
Paying the cards off completely will raise his score faster, but if you can just get them under 30 percent it will help. That might also let you guys keep some money in savings for an emergency.
Regardless, I would make paying those cards off priority one – because you will end up paying a LOT more over the life of your home loan if he goes into it with a low credit score. If he can get his score up into the 650 range over the next year or so, then you will be in a much better position when you apply for a home loan. Over 700, and you will have a real shot at a nice interest rate.
Your other option would be to take your $10,000 and go ahead and try for your home. It’s really going to come down to what your priorities are. The exactly correct financial thing to do is to pay off the cards completely, do not close the accounts, and wait a year or two to get a home. However, life is not always exactly financially correct, so you guys are going to have to do what is right for your family right now.
There is always the possibility of getting the home at a high interest rate, paying off the cards over the next couple of years and re-financing your mortgage.
So, to sum up, yes paying off (or paying down) those cards will raise his credit score over the next six months. His credit score will not skyrocket overnight if you pay them off – it will take at least a month. To see the full benefit, you have to maintain this for six months to a year.
So the real question is, how much interest are you willing to pay on your home? Buy it sooner and you will have the home, but pay more for it. Wait to it, and you’ll be in a stronger position financially, with no credit card debt, and pay less in interest.
Thanks again for your question, hope this helps!