What Your Credit Card Balance Might Be Holding You Back From

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Despite the fact that credit cards offer many rewards and benefits, I am not a die-hard credit card user. I have friends and family who put nearly every purchase on their main credit card, and then pay it in full each month. And as long as I could always pay my balance, this wouldn’t be a bad system for me. But for some reason, exclusively using my credit card makes me really anxious. In my head, when I’m using my debit card, I know I have the money to back up my purchase, because it’s coming right out of my account. But when I’m using my credit card, even though I would still know I had the money to back up the purchase, the fact that I’m spending on credit, as opposed to paying with cash coming right out of my debit account, makes me nervous. Is this an irrational fear? Yes. And it is a fear that likely developed from reading too many credit card horror stories. Does this fear prevent me from using my credit card responsibly? Of course not. I still use my credit card for a lot of things (all automated payments, any online purchases, and several other things that aren’t coming to mind right now), and I pay it off in full every month.

I’ve mentioned this before on TFD, but I’ve never really had a running credit card balance. And this is certainly not a morally or financially-superior act, because it’s mainly the result of only having had a credit card for two years. And it’s also because keeping a balance on my card would make me panic constantly. I wish I were exaggerating. But even though this anxiety is embarrassing, I think it’s important to know where your own personal boundaries are. This means if I really want to buy something on credit (a plane ticket, say), and I know I won’t be able to pay it off by the time my balance is due, I can’t make the purchase, because of my own self-imposed rules. (And I admit, that this is perhaps not always practical, and certainly not the way everyone would choose to do things.)

I had never really thought about how my conservative credit card approach affected my credit score or other parts of my financial life until I learned that 54% of Americans still believe that keeping a running balance can help your score. This is, according to NerdWallet, very untrue. In fact, NerdWallet’s expert featured in the article about the survey said, “The only thing carrying a [credit card] balance will do is cost you money.”

But now, unfortunately, there is about to be one more downside to keeping a running credit card balance. Fannie Mae (that hoe) will be taking credit card balances into consideration for those applying for mortgage loans. According to the Forbes article that explained this change in the system to me, here’s a surface-level explanation behind the decision to change the considerations for mortgage loans to include credit card balances:

“Imagine two hypothetical people:

‘Mary’ has a credit card with a $5,000 limit. She has only one credit card and has used it for more than 20 years. Because this was her first card, the limit is still very small relative to her income. She makes $300,000 a year and spends about $4,500 every month on her card. But she pays the statement balance in full and on time every month.

‘Joe’ has five credit cards with total available credit of $25,000. He only makes $24,000 a year and has $5,000 of credit card debt. He is only paying the minimum due on that debt, but he has never been late.”

So the idea with Fannie Mae’s new policy is that when giving mortgage loans, if we take into account credit card balances, it will help the process favor ‘Mary’ a little more, because she is a lower risk applicant than Joe is. Forbes contributor Nick Clements says, “Clearly Mary is a better credit risk than Joe. However, all else equal, Mary would likely have a much worse credit score because of her high utilization rate compared to Joe.”

Fannie Mae put these new qualifications out in a press release that went out in October of 2015. These changes are supposed to take effect in mid-2016. If you’d like to comb through the Fannie Mae release, the section we’re discussing here is the one on “trended credit data.” To break down the change, the release says that as of now, the reports that mortgage lenders look at only consider whether the applicant has outstanding balances, or whether they pay their minimum monthly payments on time. However, this change “will allow lenders to determine if the borrower tends to pay off revolving credit lines such as credit cards each month, or if the borrower tends to carry a balance from month-to-month while making minimum or other payments.” Essentially, the new report will give a wider financial picture of the person applying for a mortgage. For more information on running credit card balances, and how credit cards affect your finances, check out TFD’s article on credit card myths here.

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