What you need to know about the impact on credit scores, when paying cash.

April 14th, 2009 by Marty Millner
Categories: Buying Real Estate
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Understanding credit, and credit scores.

Recently a mortgage person I have worked with, sent me an article, headlined, “A recession era warning: be careful about your efforts to cut spending – Don’t slice into your credit standing.

I found this article to be very informative, and insteresting. Mortgages today, are extremely credit score driven. Only those who have FICO scores above 720, and in some cases above 740, will be able to get the best financing terms. 700 used to be the benchmark score. If you are not familiar with what FICO means, click on FICO link. It is definitely important to understand credit scoring, especially if you will be looking for a mortgage in the near future.

Back to the article. Did you know that setting your credit cards aside and paying only with cash may be a great way to cut spending, but it can actually hurt your credit scores? Many consumers are not aware of such a risk, and this typifies the gap in knowledge by the public, about credit scores in general. Because most of us need access to credit or at least want to have the option of being able to borrow money, we need to be aware of our credit score, and understand steps to take that will help either keep the score high, or if it is not where you want it to be, understand how to increase it.

Credit score tips:

1. Best way to improve your score quickly, is to pay down your credit card debt. There is nothing that gives you more bang for the buck, than getting balances down. If you do pay your balance in full, pay attention to how much of your limit your using at any given part of the month, because typically the balance that’s reported to the credit bureau is the balance on your last statement. Many belileve that if they pay their credit card balance off monthly, that there credit report will show a zero balance, but that is not necessarily true.

2. Many experts recommend using only 30% or less of your available credit limit, and less if possible. The credit scoring system is based on a history of defaults and a person in trouble typically runs up charges to the maximum of their limit.

3. Be aware that if a lender wants to lower your limit, or raise the rate, you can take your business elsewhere, especially if you have strong credit. You can call your card issuer, and let them know that. You may want to check other card offers, at www.CardRatings.com, or www.CreditCards.com, and tell your card issure that if they don’t put your limit back, or revise the rate, you will transfer your business to another card. If you credit score is below 700, search for other options. If you can get a personal loan, it might be a better option. Moving to a personal loan actually will help your credit score becuase debt on installment loans isn’t counted as heavily against you as debt on credit cards.

4. One of the common misconceptions about credit scores that people have is thinking that if they close an account, it will help their credit score. That is not necessarily the case, since closing an account that has many years of good payment history, while leaving newly opened accounts in tact, may worsen one’s credit score, because of the loss of the lengthy history of strong payments. Be careful about accetping the 10 to 20% discounts that departments stores offer for opening charge accounts, especially if you will be needing credit in the near future. The new account will represent an additional credit line, with no credit history, which is interpreted by the credit scoring system, as a negative.

5. Probably the most common mistake people make involving their credit, is simply skipping a payment on a bill. Even one skipped payment can cost you 100 points on your credit score. It is really important to be sure that all of your bills are paid on time, every month.

6. Each of the 3 credit reporting bureaus, Equifax, Experian and TransUnion, will provide a free credit report, once a year. You can also buy your FICO report at sites like www.MyFico.com, for 15.95. It is especially important to check your report at least once a year, so that you can report any mistakes, quickly.

I hope that this information and the tips have been helpful. If you have any other questions about credit scores, or want to understand whether you are able to qualify for a mortgage, please contact me.

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