Credit Card Usage and It's Impact on Your Credit Score

Another great bit of information from our friend Heath Albritton from F&M Mortgage.

With credit availability constricted in nearly every financial sector, consumers are appropriately concerned with maintaining their credit scores.  We will try to answer several common questions regarding which financial behaviors actually affect your score.

80 Percent of Your Credit Score

Credit card balances, credit limits, and whether or not payments have been made on time determine eighty percent of your credit score. Some banks automatically close cards that are inactive, so you need to make sure that doesn’t happen in order to keep your score as high as possible. The solution may be to either put a charge on that card occasionally or use it to pay for something that you automatically charge every month, such as a gym membership.

Should I Close an Account I rarely Use?

Frequency of use isn’t noted on a credit report, so it does not affect credit scores.  Maintaining a credit card with a $0 balance won’t hurt your credit score.  However, closing a rarely used account may actually lower your score. The reason that closing an account (even an inactive one) affects your score is that your total available credit limit decreases. This immediately affects the ratio of your current debt to your current overall credit limit. Let’s say you have three cards, each with a $2,000 credit limit. This gives you a total overall credit limit of $6000. Now let’s imagine you have a $500 balance on two of those cards and a $0 balance on one. This gives you $1000 in debt. If you were to close the card with a $0 balance, your debt total is not affected.  However, your total available credit is reduced to $4000. On paper, you’re now using 25 percent of your available credit whereas before you were only using 17 percent of your available credit. Also, the older a credit account is, the better it looks on your credit report.

What actions to Avoid if you Plan on Applying for a Mortgage

If you are planning to apply for a mortgage or refinance, you should avoid several actions:

1. Don’t apply for new credit. Until you build a history of on-time payments, your credit score will decrease. Wait until after the closing before opening any new credit accounts.
2. If you have an old collection on your report, but no one has contacted you about in over two years, do not pay it off.  Only collection items that have been active within the last two years will count towards your FICO score.  If you pay off an old collection, it will show up as current activity and affect your score. Talk to your mortgage professional about which accounts need to be paid off to increase your score and which ones need to be left alone for now.
3. Using a consumer credit counseling agency will count against you when it comes to mortgage underwriting. The statistics show that the majority of consumers who use a credit-counseling agency eventually apply for bankruptcy, so mortgage underwriters often see this as a negative.

Your mortgage professional can be an invaluable asset in determining exactly how to maintain your credit score or increase it. Don’t hesitate to ask him or her about what you need to do to before applying for a refinance on your current mortgage or a brand new mortgage altogether.

MiddleTennessee Real Estate Specialist

When you are ready to buy or sell property in Tennessee, it's time to work with Diane O and Friends. Our team of professionals always does their homework and we will find you the best deal at the best possible price. For more information about Diane O and Friends and how we can best serve your Middle Tennessee real estate needs, please fill out the online contact form or call us direct. Office: 615-371-1544 Diane Cell Phone: 615-406-2184 Mandy Cell Phone: 615-477-6959 Fax: 615-472-7931