Understanding Credit – Credit Myths Part 2

I discussed the importance of understanding your credit in last month’s edition, as well as a few Credit Myths. This month I will provide more Credit Myths that many believe to be true…but are not!
“MY FICO SCORES WILL DROP EVERY TIME A MORTGAGE COMPANY PULLS MY CREDIT!” This is one of the longest-standing myths that was generally perpetrated by Mortgage Brokers starting back in the 1990’s, when there were no credit programs to help lenders provide borrower credit solutions to help increase their scores. Let’s take, for example, a borrower who had a 620 score when the initial lender ran credit. The broker would instruct the client to make sure and NOT have any other lender run the credit because the score would drop as a result and the borrower would suffer a much higher rate. WRONG!! It was used as a scare tactic to make sure the borrower could not shop his loan. Pretty savvy, right? More like pretty dishonest. The fact is…the FICO system is very fair and allows borrowers to shop and have other lenders run credit for a period of up to 45 days…WITHOUT suffering any reduction in FICO SCORE as a result!
“Installment credit (cars, mortgages, student loans, boat loans, etc) determine the basis of your FICO scores.” That is a BIG FAT NO! Of course it is important to keep those accounts in good standing, but it is your REVOLVING CREDIT (Credit Cards) that contribute mostly to your FICO scores. Consider this; all of the installment loans on your credit report will be paid off at some point, meaning they will at some point show a CLOSED status. As if you never had those accounts. But your REVOLVING accounts are the break and butter of FICO SCORES! The longer you have an account, the lower you keep those balances, and your continuance to use those credit cards are the hallmark of your scores. And here is some very important info that you should take to heart: You should keep a credit card to installment account ratio of 3-1, meaning that for every installment loan, you should have 3 revolving accounts (credit cards) to offset. That will serve you well.
“If I am not using my credit cards, I should cut them up!” Absolutely NOT! NEVER! It is important to provide continue history of your credit cards, and NOT using them doesn’t help because at some point, the creditor will consider the card as inactive and you will lose active status. It is important to use your credit cards every few months, even if you pay it off after…just to keep it active and alive for scoring purposes. NEVER CUT UP YOUR CARDS…you still should use them for small purchases (gas, a tie, dinner, etc) even if you don’t want to!
If you have any questions, or would like to know more about credit and what you can do to put yourself in better position to qualify for a loan, please call Curt Kravitz at 661-705-2500, option 1. He has been serving Santa Clarita for over 34 years! Education is what he has always been about! Tune in next month when Curt will discuss VA loans, their many aspects, and much the general public doesn’t know about them!