With interest rates low, homeowners looking to refinance their mortgages are finding out the hard way about tough new lending restrictions. If you’re saddled with too much debt these days, chances are, you’re going to be out of luck if you’re looking to lock in a lower rate.
Everybody knows that there's a shortage of credit in the economy right now. Major lenders such as Bank of America (Stock Quote: BAC) and Citibank (Stock Quote: C) have tightened their lending restrictions, and even government-backed mortgage giants Freddie Mac (Stock Quote: FRE) and Fannie Mae (Stock Quote: FNM) are getting more cautious to reduce the impacts of rising loan defaults. While that might improve the industry's bottom line, it's catching a lot of would-be borrowers by surprise.
Credit scores are a big determinant of whether a lender deems you worthy for a loan. And your credit score will suffer if you've used up more than a third of your available credit, or “credit utilization” in industry-speak. It's a little known component of your credit score that's affecting many consumers these days.
"There's definitely an increasing number of credit scores that have fallen based on higher debt levels," says Carol Wilson, a financial education specialist with Consumer Credit Counseling Services of Atlanta. "And lenders don't want to extend credit unless a score is 680 or above, which means it's very important for consumers to lower their debt levels."
With lenders lowering credit limits on credit cards and other loans, borrowers are suddenly finding out that their existing debt is taking up a bigger percentage of what’s available to them.
Wilson recommends making it a priority to lower your credit balances. That could mean using cash from savings to pay down the debt, or it could mean sacrificing some of your down payment. "Using too much credit can have a huge negative impact on your score," explains Wilson. "If you have money for a down payment, you're likely better off shifting some of it towards paying down your debt."