• The Credit Cowboy

Credit Myths Exposed: All Credit Is Equal

Updated: Jun 18, 2018

By: Steve Altonian

One area I have noticed there is a lot of misunderstanding & misinformation is in regards to how different types of credit impact a consumers credit score.  Many Loan Officers & 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.  Unfortunately, Industry Professionals, clients, & a ton of Credit Repair Specialists fail to realize that 10% of one's credit score is TYPE of credit.  10% can mean A LOT of points, and the difference between a loan & a loan denial. Most of the time when Loan Officers come to me to assist their clients they want achievable results, and they want them fast.  So I'm going to address the quickest way to get a credit score spike. 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.  

  • NOTE:  You will likely see a dip in score due to the inquiry and new account (new account will impact your average age of accounts). That will go away in 3 - 6 months, most likely.

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.  I will touch on this briefly a little later. 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. (Note: we're talking about credit cards specifically - HELOCs are treated differently by the credit bureaus.)  NOTE:  A HELOC affects your credit just like any credit card account or other loan. What's surprising is how it affects your FICO credit score. How much of the available credit you use on your HELOC is not considered by the FICO score, a stark difference from a credit card.  So everything is not as it seems. 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.  When I need every FICO point for my Loan Officer's borrowers, I always steer their clients to a 20% utilization rate.  It brings amazing results.  Utilization rate needs to be kept at a healthy 20% in that billing cycle. However, the utilization rate only applies to credit cards for revolving accounts. HELOCs aren't considered revolving accounts by FICO when it comes to utilization rates, even though they look like them on a credit report.  Most credit scoring models penalize you for using more than 30% of your available credit.But in most cases, the balances on your installment loans aren't factored into this ratio.  In fact, your installment loans have a much smaller impact on this portion of your credit score. 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.  We cannot "massage" these accounts to spike the score. Word of caution to all Loan Officers:  Never have a borrower pay off a car loan to try to increase their score.  The only reason to ever have your borrower pay off an auto loan is for DTI issues. A credit card carries more weight than a mortgage & 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 clients credit profile, good or bad.... For quicker Credit Score results, always choose "Revolving Debt over Installment Debt".....

As usual, if you have any questions about any credit related topics, or current loan files, please email me, or give me a call....

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