Consumers In The Eyes Of Lenders
Your credit history may seem like a vague and abstract stack of file entries to you. But to banks, the numbers and ledger entries are all they need or want to know about you. What lenders find in your credit report will determine how they respond when you apply for a mortgage.
As it turns out, the way that you use your credit gives very distinctive clues about you. Your credit card usage shows how you are likely to behave when you pay a home loan.
If you have credit cards and use them regularly, your behavior is likely to fall into one of three categories. You pay off your cards completely each month, a substantial portion of your balance or just enough to stay in good standing.
Somebody Studied How Predictable Consumers Can Be
In a 2013 study, TransUnion conducted a study that concluded there are three types of credit card payers. The TransUnion Study showed that these categories also indicated the likely future behaviors of borrowers. The study referred to consumers who made full payment monthly as transactors. The term that describes card members who pay only part of the balance or the minimum as revolvers.
By analyzing tens of millions of consumer habits with credit cards, car loans, and mortgage payments, TransUnion found that revolvers have three times the mortgage default rate of transactors.
Using credit cards will build your credit score precisely because the credit agencies want a detailed history of your activity. Charges and payments will show a statistically measurable record that shows the experts how you are likely to behave in the future.
Lenders now use software that includes analytics that discovers information about transactors and revolvers into their lending decisions. This new approach is excellent news for many homebuyers. The metric will raise the number of applicants who win approval for the best terms and lowest interest rates. Borrowers who pay off credit card balances the most quickly will have the best access to home loans.
Apply For A Mortgage Like A Transactor
So what does this mean for consumers thinking of purchasing a new home or refinancing? Anyone who thinks they might wish to buy a home at some point in the future should craft their reportable credit activity accordingly. Become mindful of how you use credit. The earlier you can develop the practice of living within your means, making purchases on a credit card but paying off the balance every month.
Using a credit card sensibly demands tremendous self-discipline. The temptation to over-spend will always be right there. If you can cope with this challenge, you can enjoy the benefits of the features that credit card companies promote, without the costs of interest payments.
Whether you choose to make the sacrifices to develop a track record as a transactor or not, if you have any credit rating at all, there is a mortgage package that will work for you. However, it’s your card repayment behavior that will determine the terms that lenders offer when you apply for a mortgage.