I recently had a past customer come in to see me about a refinance and I was startled to see how his credit report came back. This isn’t one of your typical stories of how a guy ruined his credit with collections and various poor credit practices. My past customer had low FICO Scores due to the amount of Credit Card Accounts that he paid off in full and closed the entire account. His scores had dropped due to the amount of closed accounts on his credit report.
This experience prompted me to write this blog about letting the consumer know that sometimes too little credit can hurt your chances on getting a home loan.
Today’s Fear of Debt
Just about everybody I know has a story to tell about the financial crisis that the US experienced during the years of 2007-2009. The entire financial structure that we once relied upon almost collapsed before our very eyes. During the 24- months of uncertainty, Banks were bailed out and emergency economic procedures were put into place to stabilize the US Economy. Many jobs were lost, and many people were affected.
Through those two years, many people had their own personal accounts on how they managed to “adjust” to through those tough economic times. One of the most lasting changes was how the US Consumer remains cautious about personal spending and the use of credit. I believe that these habits are caused by the fear of those times, and no matter how good things appear to be now; there is still doubt in our minds that things can go back to tough all over again…
Today’s consumer is far more cautious with their credit use. Some of these examples are seen in the credit reports that I see when taking a prospective client’s Loan Application. Less credit is used and many accounts are paid in full and closed. However, the losing of accounts can sometimes LOWER your Fico scores and I will tell you why…
Pay Off vs. Closed Accounts
There is a difference on how your credit is reported when you pay your bills. The basic rule of thumb that I give my client’s when it comes to keeping good Fico Scores is to have a 30% or under balance on your overall credit. For example, if you have a Credit Card with a $1,000 line of credit; it is important to have the account with a $300 dollar balance or less to maintain an overall good credit standing, (this also means to make the required monthly payments and not to exceed a carry over balance of more than 30% of the line of credit). Anyways, the basic understanding is to make sure you pay your bills and avoid paying off AND closing the account.
When you close an account, this means the account is no longer in use and therefore there is no longer an active credit history to report to the Credit Bureaus like Fair Isaac, Trans Union and Equifax. This ultimately can get you in trouble when it comes to applying for home loan.
In summary, keeping a good credit history is important for a variety of reasons. If you are uncertain what your credit history looks like, please feel free to contact me and arrange an appointment to discuss and review your credit status.