I got some shocking news yesterday. I am currently recording telephone interviews for a semi-monthly podcast I will be launching soon and 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). 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. What? Wait a minute! Isn’t the responsible thing to do paying off your balance every month because t shows that you only spend what you can afford to pay, that you aren’t spending beyond your means?
Why Paying Off Credit Cards is Bad
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!
More bad news! Since 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
With mounting disbelief, I asked him: So what your saying is, in order to get a good credit score, I have to pay exorbitant interest to a credit card bank) in effect paying more money for whatever I purchased with the card) in order to get a good credit score? Yes, he said.
But don’t mortgage companies look at your actual credit report and see how financially responsible you are with your credit cards, I asked? Won’t they see that by not carrying a balance, using your card as a convenience to pay bills already within your monthly budget, you are a better risk for being able to make the mortgage payment every month? Yes and no, he said.
That kind of credit report would most likely result in a mortgage underwriter charging more points and a higher interest rate for that person. 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? Yes!
This Isn't Right!
I don’t know about you, but this stinks! According to him, this reflects a change over the past few years in how credit is rated. He has seen people with scores in the 800s now have them in the 700s. 650 is the new 750!
I will post a link to the podcast episode here once it is released, so you can hear the full interview, but in the meantime, what do you think? Is this right? Does this practice by FICO and credit lenders provide a more accurate profile of your credit worthiness, or is it simply a scheme by the banks to get you to incur debt at high interest rates, so they can make more money? Please leave your thoughts in the comments.
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 dpostorivo[email protected].