Understanding Credit – Credit Myths, Part 2
I discussed the importance of understanding your credit in last month’s edition, as well as some credit myths. This month, I’ll be providing more credit myths that many think are true… but aren’t!
“MY FICO SCORES WILL DROP EVERY TIME A MORTGAGE COMPANY DRAWS MY CREDIT!” This is one of the oldest myths that was generally perpetuated by mortgage brokers starting in the 1990s when there was no credit program to help lenders provide credit solutions to borrowers. to help increase their scores. Take, for example, a borrower who had a score of 620 when the original lender extended credit. The broker would ask the client to make sure that no other lender is handling the credit as the score would drop as a result and the borrower would incur a much higher rate. WRONG!! It was used as a scare tactic to ensure that the borrower could not buy his loan. Pretty savvy, right? Rather quite dishonest. The point is… the FICO system is very fair and allows borrowers to make purchases and credit other lenders for up to 45 days… WITHOUT reducing the FICO SCORE as a result!
“Installment credit (cars, mortgages, student loans, boat loans, etc.) determines the basis of your FICO scores. This is a BIG NO! Of course, it’s important to keep these accounts in good standing, but it’s your revolving credit (credit cards) that primarily contributes to your FICO scores. Consider this; all installment loans on your credit report will be repaid at some point, which means they will show a CLOSED status at some point. As if you never had these accounts. But your REVOLUTIONARY accounts are the backbone of FICO SCORES! The longer you have had an account, the more you keep those balances low and your continued use of those credit cards is the mark of your scores. And here is some very important information that you should take to heart: You should maintain a 3-1 credit card to installment account ratio, which means for every installment loan you should have 3 revolving accounts (credit cards ) to compensate. It will serve you well.
“If I don’t use my credit cards, I should cut them up!” ” Absolutely not! NEVER! It is important to provide a continuous history of your credit cards, and NOT using them does not help because at some point the creditor will consider the card to be inactive and you will lose active status. It’s important to use your credit cards every few months, even if you pay them off afterwards… just to keep them active and alive for scoring purposes. NEVER CUT YOUR CARDS… you should still use them for small purchases (gas, ties, dinner, etc.) even if you don’t want to!
If you have any questions or want to learn more about credit and what you can do to put yourself in a better position to qualify for a loan, please call Curt Kravitz at 661-705-2500, option 1. He serves Santa Claus Clarita for over 34 years! Education is what it always has been! Tune in next month when Curt discusses VA loans, their many aspects, and a lot the general public doesn’t know about them!