Did you know that paying off your credit card bill every month, and not carrying a balance, could actually hurt your credit? Me neither! But I was talking to Domenic Postorivo of Greentree Mortgage about when you can get a mortgage after filing bankruptcy (a question I am often asked by clients), and he told me something that still has me shaking my head.
We were talking about ways to improve your credit score, and he mentioned carrying a balance on credit cards was a good way to do it. But isn’t the responsible thing to do paying off your balance every month because it shows that you only spend what you can afford to pay, that you aren’t spending beyond your means?
Apparently not! As he explained, if you pay off the balance every month, then your credit report never shows a balance. Thus no one has actually “lent” you money and trusted you to pay it back. Since 30% of your FICO Score is based on debt load, not actually having debt doesn’t help!
What makes this worse is that ince you don’t have the “debt,” you aren’t actually “paying” it. If the payment for the full amount of the bill for that month hits their system on or before the due date, the payment is not reflected in your payment history, which represents another 35% of your FICO Score!
You Have to Have Debt to Get Debt
Apparently, in order to get a good credit score, you have to pay exorbitant interest to a credit card bank in order to get a good credit score. Far from making you look financially responsible, your not carrying a balance gives you the kind of credit report that would most likely result in a mortgage underwriter charging more points and a higher interest rate.
So, in effect, people that are responsible, carry little or no debt other than a mortgage and a car payment, can actually have trouble getting a good interest rate!If you are looking for more information on credit and how to get a good mortgage rate, feel free to call Domenic Postorivo at 609-221-8979 or e-mail him at [email protected].