We have an idea of what is important in keeping our credit score at a healthy high but having just a little more knowledge can save you from having your score drop unnecessarily.
Louise Johnson of Prime Lending submitted the following helpful explanation of the factors that effect your credit score. This information was provided in part by
Credit Law Solutions, and I think it may help clarify a lot of the myths
about credit scores.
Louise: There is a lot of misunderstanding &
misinformation in regards
to how different types of credit impact a
consumer’s credit score. Many borrowers are under the impression that a
car loan, mortgage, or other type of installment loan will
raise their score immediately, as would revolving debt.
Installment Debt vs. Revolving Debt
Installment credit comes in the form of a loan that
you pay back in level payments every month. The amount of the loan is
determined at the time of approval, and the sum you've borrowed doesn't
change over time. Examples of installment
credit include mortgages and car loans.
.
Revolving credit is not issued in a predetermined
amount. You'll have a limit to how much you're able to borrow, but the
amount you utilize within that limit is up to you. Most revolving loans
are issued as lines of credit, where the borrower
makes charges, pays them off, then continues to make charges. Examples
of revolving credit include credit cards and home equity lines of credit
(HELOCs).
Revolving accounts are the key to a healthy FICO score
You probably know that a healthy credit report
contains a varied mix of credit types; in all likelihood, you have both
revolving and installment accounts open right now. This means it's
important to know that revolving credit is a powerful
force in determining your credit score. In fact, it has the potential
to do big damage if you're not careful. It can also be used to spike a
credit score upward.
First and foremost, any account you don't pay on
time will hurt your credit. Thirty-five percent of your score comes from
your history with paying your bills by their due dates. Consequently,
it should be a priority to make all your credit
payments - revolving and installment - on time.
But revolving credit weighs 30% of one's score & is the second-biggest portion of your credit score.
Credit scores consider how much you charge on your
credit cards versus how much credit is available to you. That's called
your utilization rate. The key is to keep your utilization rate below 20
percent for each credit card account and
for all accounts in total.
Here is a little known fact: Mortgage payments
& car loans absolutely hold a lesser weight on your client scoring
model. The balances are basically irrelevant & have zero impact on
the FICO score. It makes no difference if it is at 90%
or 30% or 10%. There is no way to "pay it down" to increase a FICO
score.
A credit card carries more weight than a mortgage and car loan and can cripple a credit score without ever being late.
The reason is because credit card debts tend to move higher over time,
which weakens overall credit position.
Mortgage debt, by contrast, eventually pays down to $0.
Remember, each revolving credit trade line affects
the credit to debt ratio AND the overall summary of credit to debt
ratio. This directly translates to the FICO score. A double dip that
Installment credit does not utilize.
Revolving & installment accounts both have an
impact on your credit score. But revolving credit is especially
influential & can dramatically alter your client’s credit profile,
good or bad....
If you have any questions, contact Louise Johnson, Mortgage Loan Originator, NMLS: 392935, at Prime Lending, 10 North Jefferson Street, Suite 110 Frederick, MD 21701
ljohnson@primelending.com 240.285.0757 
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