I’m Done with Credit Cards

Stop Using Credit Cards

Is it time to stop?

…for the next three months.

We’re going to be trying to get pre-approved for a new mortgage soon.

As a self-employed family, we need our credit score, and debt-to-income ratio to be as rock-solid as possible.

Therefore, for the next three months we’re using only our debit card to make purchases.

This stinks because we usually do all of our spending on our Chase Freedom credit card. The card pays at least 1% cash back on all our spending. So we stand to make over $100 each quarter.

That’s $100 we won’t be earning this year. But if it means getting a great mortgage rate then it’s worth it, right?

Why are we doing this?

Like I said, we need our credit score and debt ratio to be optimized. Ironically, using our credit cards like we do helps us to maintain a good score, but in this instance, reporting a big balance is hurting us. Let me explain.

How Big Credit Card Balances Are Reported

Financial institutions report your information to the credit bureaus in a variety of ways. I believe at their choosing. This is something out of our control. So even though we pay off our credit card balance in full each month, our latest period-ending balance is reported. Here’s more from creditcards.com on the issue:

Banks pass your account information, including balances and limits, along to the credit bureaus, which in turn list that information on your credit report. When you (or a lender) request to see your credit score, the current information on your report gets plugged into a credit scoring formula. The issue for heavy-charging — but otherwise responsible — cardholders is exactly when various lenders report information to the bureaus.

To anyone looking to lend us money, it appears as if we have a hefty amount of credit card debt. Remember, we do all of our spending (except our current mortgage payment) with our credit card, netting us close to $500 each year in rewards.

How This Affected Our Refinance

This whole thing came into play last Summer when we were refinancing our current place. Even after telling the lender how we paid the credit card off every month, and even showing them our statements, the lender asked us to close down the account completely so that we could complete the loan and meet the needed income-to-debt ratio.

I laughed at them and then realized they were serious. To avoid having to do this, we paid off our low-interest car loan. Then all was right in the underwriter’s eyes.

Now, there’s no more debt for us to eliminate. So this time around I’m not taking any chances. We’re stopping the credit card use a month before asking to be pre-approved for a mortgage. To be honest, I’m hoping we didn’t wait too late to start this, with reporting delays and all.

Additionally, (and I’m making an assumption here based on my understanding of credit utilization) our credit score is affected by this reported credit card balance. So, it’s just best to be safe and eliminate the revolving debt.

More Important Things to Do Before You Apply for a Mortgage

Other, might I add, more relevant, things we’re doing to improve our chances of getting a mortgage include: making sure it fits for our budget, saving up a big down payment, getting our current place under a rental agreement, and getting my small business finances and taxes in order.

Hopefully, we’ll overwhelm the lender in these areas and the “phantom” debt won’t be an issue like last time.

Update: Two readers have chimed in with potential solutions to my problem.

  1. I could talk with the credit card company and find out exactly when they report to the credit bureaus. Then simply start paying my bill off in full before that date each month.
  2. I could “prepay” my credit card usage (i.e. make a pre-payment to the credit card, forcing a positive balance).

In both situations, we can continue spending on the card like we normally would and still earn the points. You guys are smart. I’m so glad I posted about this. I’ll update you again once I try one of these methods.

Image by Uwe Hermann

Last Edited: February 16, 2012 @ 11:29 amThe content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. Iam1percentblog says:

    Guy, 1% cash back? You should be getting way more than that…at least double. Check out my blog to see how (http://www.iam1percent.com)

    • @Iam1percentblog I probably do get closer to 2% with the Freedom card’s rotating categories. That’s why I said “at least.” I don’t bother with many of the advanced tricks (multi-cards, gift card buying, etc.) because I have found that they are not worth my time. I’d love for you to share a guest post here explaining how you max them out and why it’s worth your time.

      • JeffreyCrews says:

        @Philip Taylor @Iam1percentblog Stay strong with the Chase Freedom! I love it. I am not really into getting super complicated with the different reward systems. As long as it is consistent and make sense, then I am good to go!

  2. Hmmmm that’s odd. Why don’t you just find out when the balance is reported and pay it off a few days before it’s reported? Im assuming that you probably have virtually no debt to make up for the risk of giving a mortgage to a self employed borrower hence this decision to stop using your credit cards?

    • @Ginger Thanks for your comment. I guess it’s the shotgun vs rifle approach. I have no idea when it’s reported, therefore, I’m just going to shut the whole thing down. Is this information (i.e. when it’s reported?) easily accessible? Yes, we have no other debt except our current mortgage, which we will be placing on the rental market soon.

      • Ok, makes sese. Are you asking if the information is easily accessible, ie when it’s reported? If so, then yes, just call your cc company and ask when the balance is finalized for reporting to the cc bureaus. So if they finalize on the 30th then you should pay the balance by the 25th.

        As far as your home going on the market and then positioning to buy a new one, you’ll want to ask your lender/broker now if you need to have reserves (separate from savings and down payment) and how much so that you aren’t surprised down the line.

        @Philip Taylor

        • @Ginger @Philip Taylor Typically banks want 6 months reserves. And this includes your estimated property tax & insurance. I think most credit card companies report on the last day of of the month.

  3. I’ve been using PerkStreet reward debit card. I’ve not made many of the 5% rotating categories but I have made between 1% and 2% over the last year. Probably because for large purchases I use the Delta Amex card for air miles. If you pay your balance off every month and are worried about your FICO you might check out one of the companies that offer reward debit cards.

    My friend uses Ally Bank, but they only gives cash back at certain retailers.

  4. I’m a big fan of PerkStreet. I thought about including a mention of them in this post, but there’s the whole building of credit issue. Can someone get a mortgage after using just PerkStreet (with no other credit usage) for several years? Would make a good blog post.

    • @Philip Taylor That’s why we keep a credit card such as the Delta Amex. 🙂 Manuel underwriting is pretty much a thing of the past.

      If you keep $10K in credit line and, as we do, keep a $2000 Amex card that is paid monthly you will use less then 30% of your available credit. This avoids the situation you find yourself in and maxes the score you get from that portion of your FICO. One guy I know keeps four cards that he uses in a quarterly fashion. January is Chase, February is CapitalOne Venture and so on. Pays that one off at te end of the month so three card show full availability. That’s too hard for me!

    • @Philip Taylor That’s why we keep a credit card such as the Delta Amex. 🙂 Manuel underwriting is pretty much a thing of the past.

      If you keep $10K in credit line and, as we do, keep a $2000 Amex card that is paid monthly you will use less then 30% of your available credit. This avoids the situation you find yourself in and maxes the score you get from that portion of your FICO. One guy I know keeps four cards that he uses in a quarterly fashion. January is Chase, February is CapitalOne Venture and so on. Pays that one off at te end of the month so three card show full availability. That’s too hard for me!

    • @Philip Taylor Good point. Obviously PerkStreet doesn’t report your payment history to your credit bureaus, so I guess the short answer is no. BUT, even someone with a few tradelines on their credit report can have “GOOD” credit score.

      The lenders criteria isn’t “how many accounts you have on your credit report.” It’s based off credit score, LTV, income, and reserves.

      • @SpringCoin Actually, credit “mix” (i.e. having different types of credit: revolving, installment, etc.) is one of the five factors that makes up your score.

      • @Philip Taylor @SpringCoin By lenders I meant “banks” for underwriting purposes for your refi/home purchase. But even so, credit mix is the smallest factor in your credit score.

  5. It is a sign of how tight credit remains for someone with no debt to have to jump through that hoop to qualify.

  6. It is a sign of how tight credit remains for someone with no debt to have to jump through that hoop to qualify.

  7. I’m done with credit cards as well. Technically, I’ve just shredded them so I don’t continue to incur more debt.

  8. I only have debit cards. I agree that the deal you have on your credit card seemed good but I am just averse to spending money on credit.

  9. This seems backwards in a lot of ways. Essentially you’re just getting punished for using your credit card even though you’re doing it in the most financially responsible way. I guess if taking away credit cards for some time is what’s best, you don’t have much of a choice. I second the PerkStreet debit card for rewards, but, as you mentioned, you aren’t going to build good credit with it.

    • @Jeffrey Trull Yeah, it does seem backwards. Like I said though, I may be being overly conservative in my approach. It’s possible this one only an issue last Summer and won’t cause a hiccup this year.

  10. Agreed. The lending environment is not what it used to be. Back in 2006 I could have just written down an income number and they’d say “approved.” In this case, hopefully I’m being over-conservative in my approach and this won’t even be an issue.