Credit is one of THE MOST IMPORTANT ISSUES IN getting a loan today.
Time and time again, I'm called by a client who says "I PAY MY BILLS ON TIME, BUT MY PEOPLE SAY MY CREDIT STINKS....
Maybe I'll just pay off my credit cards today.....
No, No, No, No Nooooooooooooo!!!!!!"
Truthfully, there is more to a credit score than just making your payments on time or paying off your credit. In fact paying off all your credit today could be a bad move. Needless to say, I've broken this down so that the complexities of mortgage credit scoring can be understood by the consumer. I reference this a lot when consulting clients. With this information you can self-analyze your situation to make sure that you monitor your scores or raise your scores to where you want or need them. In other words, this serves as a roadmap to building a good credit report.
Here are all 5 factors in the order of importance:
1) Payment History has a 35% impact. Paying debt on time and in full has a positive impact, and late payments, judgments and charge-offs have a negative impact.
2) Outstanding Credit Balances have a 30% impact. Debt ratio of outstanding balance to available credit is important. Keeping that below 50% is wise and below 30% even wiser. It is never a good idea to close an account; the debt ratio will go up and the number of seasoned lines will decrease. Pay outstanding debt down as close to zero as possible and evenly redistribute the remaining balance among the open lines. The increased interest incurred by moving a balance from a 0% card to a 23% card will be minimal relative to what the increased mortgage debt might be with a low credit score. Hitting the maximums of available credit can be very negative. It may be worth calling and asking the credit company to increase your available credit to lower the debt ratio, provided they can do so without a hard credit inquiry.
3) Credit History has a 15% impact. The length of time a particular credit line has been opened is important. A seasoned borrower is stronger.
4) Type of Credit has a 10% impact. A mix of auto loans, credit cards and mortgages is positive, rather than a concentration in credit cards only.
5) Inquiries have a 10% impact. Hard inquiries for credit will negatively impact the score. Auto and mortgage inquiries receive special treatment and 20 inquiries can be made in a 14-day period for auto or mortgage and will be treated as only 1 inquiry. The maximum number of inquiries that will reduce the score is 10. Any inquiries beyond that [11+] in a six -month period will have no further impact on the borrower. Each hard inquiry can cost 2-50 points on a credit score.
Make sense? It does to me. File this away in your back pocket. Every time you want to save 10% on the flashing blue light special for signing up for a new card....well...you may be paying a lot more than that with all of your other credit if your scores drop. Know your facts, call me if you want to talk further on how this may affect you.
If you choose, you can find me here:
NMLS ID#158606 
An Illinois Residential Mortgage Licensee
Great information, thanks for sharing. Did you know that HELOC's are also seen as a revolving account and can effect a credit score if that is the only revolving account and the balance to limit ratio is high. Just a little something I learned recently. Thanks for the post
Great info Larry...you always present such useful info to your buyers and sellers!
Larry - paying off the wrong credit card or collection can really hurt a customer - great advice!
Larry - I preach and preach to my boys (adults with famiies of their own) about credit and using it wisely, and what happens if you allow your credit score to drop. It is like getting grades back in school, have to be earned and be responsible. Great post.
this is great information to have... I'm BOOKMARKING it now! (and reblogging).
Larry, Seems you and I have studied with the same credit agencies! LOL! Excellent advice. I think on the biggest hits consumers have taken on their credit scores has come from creditors arbitrarily cutting credit card or credit line balances, resulting in a credit balance(s) going from 20 - 30% all the way up to 100% of available credit. Want to see a credit score drop like a rock off a bridge? That will do it. Nicely done.
Good information, had a client recently that paid off all her cards and closed the accounts. Yikes no credit. No loan.
Darla......good words on the HELOC, being a revolving. Love the info.
Kristin...you're welcome.
Eleanor....good info.
Carla....it's all about "earning it."
Alan...thanks.....you da man!
Deborah....I see that all the time. Good words and great advice.
Missy....simply put, but tragic results!
Larry - One of my favs is I rolled all of my cc debt on to one low rate card! YIKES!
I learned a long time ago not to pay off all the balance. Why, for all the reasons you stated and then they will lower your available credit. Weird..
I bookmarked this for my clients and will reblog later. Thanks.
This will be helpful to share with my friends, clients and customers. Thank you for the post.
Nevin....bingo!
Don....Thanks a bunch bud.
Donna......you're welcome.
Larry - Great advice to assist Americans with understanding how the credit scoring system works.
The sad thing is credit card companies have been reducing credit lines and closing accounts for many consumers lowering their scores. Often after the scores have decreased the same consumer, who having done nothing wrong, receives a letter stating that the card companies risk has increased so the interest rate is being increased on the account. Makes me wonder if this was not the plan all along.
Always good advice!
Very informative post!
Larry: Thanks so much for the info! I'm reblogging now :)
Thanks Larry,
We need to be reminded evry now and then. I often have discussion with my customer about their credit score.
We have a solution to this problem. I have a car loan. Then I have one low limit credit card. I know in theroy I should be building credit. In practice I do not want it.
Larry thanks for the useful info!
Good stuff to know. There are a lot of myths and misinformation on this important topic.
Larry - Thanks for this helpful info! :)
Thanks all. I appreciate it! It's good to have info that will inform your clients and the consumers!
Gene #19 you may not want credit but credit makes the world go around. I had a client who had the same position about credit that you did. When it came time for him to get a mortgage he could not. I told him the banks want to see that you know how to manage credit. By you not having any credit you can not show them. Also, you do not want credit but now you are looking for credit in a mortgage?
Great information to share with buyers and sellers, thanks for sharing.
Ah ha! I knew this information was out there somewhere... :)
Great post, people really need to start paying attention to this.
I wish someone would have shared this information with me several years ago. I was of the belief that the thing to do was pay them all off and get rid of them. NOT! and now I am suffering for bad advice.
You can definatly see a difference when CC balances change, I didn't know about the inquiries though. Thanks
Great info.. Thanks for sharing..
Thanks for the refresher and sharing the 50% and 30% as before, I had only heard the 30% so I've been slowly increasing credit lines to drive below the 30%. Then I hope to refi 2 properties so it sounds like I should start the ball rolling on both at the same time.
Great info Larry! I learned most of those tips many years ago; but its always good to get a quick recap. Thanks for posting!!!!
Thanks for the very good advice, Larry. Now would you just please go in and adjust mine a couple hundred points upward, or do I need to talk to your superviser, or a computer geek?
We are in the catch 22. Uh, sorry, we can't approve you because you don't show enough lines of credit. Well, if you don't approve me for another, how do I build it up?
So we're living within our means, and eschewing unnecessary debt and credit (i.e. potential temptations), but this type of person is penalized by the system. What kind of system penalizes people like us? A system contrary to the good of mankind and to...
FREEDOM.
"The borrower is SERVANT to the lender." Not just a suggestion; transcendent wisdom from God.
All good information here today. Thanks for sharing.
Patricia/Seacoast NH
Lots of good, detailed, specific, actionable info here - thanks for sharing it. We will be passing it on to our clients.
Mel
This is really good information, and helpful for me as well.
Keith......go get and installment loan or a secured credit card and let it brew!!!!! You'll get there!
Everyone else.....thanks a ton!!! Great to have good feedback
the bottom line is not even the experts are experts.. but at least we should make educated moves
thanks for the heads up
Excellent work. You've just been re-blogged. I hope you don't mind.
I can't imagine a more concise set of instructions for people seeking to improve their standing. Thanks.
This is really great information in this changing credit environment. I'm reblogging.
Larry, it makes sense. Thanks for the information and the reminder.
Useful information to keep handy. Thanks.
Good information, thanks.
Gary - great information for buyers! So many lenders it seems don't take the time to explain these things to buyers and it can be very confusing for them. I am reblogging it now for our Elk Grove area buyers!
With all of the good information on credit scoring out there today, it is amazing that people still make the mistakes managing their credit.
We have someone right now who cannot buy because they paid off everything and have been using cash for the past 2 years -- a no no in the world of house buying.
Where do you get this information? Can you cite sources? Is it verified? Who says payment history is 35% and outstanding balance is 30%? Where is that information published? Thanks
Good stuff, Larry. I reblogged.
Larry this is a question I hear all the time and thanks for clarifying.
. Auto and mortgage inquiries receive special treatment and 20 inquiries can be made in a 14-day period for auto or mortgage
Jayson....I recieved this information from the repositories directly.
Great info Larry. Thanks for Sharing!
54 comments so far! I'm not surprised! This is good information! Is there some list out there any where that lists the best credit card companies to deal with "during these tough economic times" and also the ones who have ,,,,,,, ........ well not been so good to work with?
Larry: Another great post... very informative... and what a great hand-out this would make for both buyers, and Realtors as well. Very well explained, and equally well presented.