Monday, January 11, 2016

Which Effects your Credit Score More? Mortgage, Credit Cards, Late Payments or Loans?

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. 
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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