Most financial services companies use a credit scoring model called FICO to determine if you qualify for their programs, as well as what to charge you for these products and services. In addition to your mortgage, your credit score can affect what you pay for your credit cards, auto insurance, and a host of other products. While FICO’s scoring model is widely accepted, it is also proprietary and often confusing. Below are a few scenarios, let’s see if you can guess the right answer on how each person’s decisions affect their credit score.
1 – Brad receives an invitation to apply for a new credit card offering a 0% introductory rate. After approval for a $10,000 credit line, he transfers his old $7,000 credit card balance onto the new card. He then closes his old card. What will happen to his credit score?
(a) His credit score will go up (b) His credit score will go down (c) This will have no impac
2 – Angelina is getting ready to buy a house and needs to qualify for a mortgage. After reviewing her credit report, she notices a delinquent balance to a creditor totaling $750 from 3 years ago. Worried about how the unpaid balance might look to a lender, she immediately mails a check for the $750. What effect will this transaction have on her credit score?
(a) Her credit score will go up (b) Her credit score will go down (c) This will have no impact
Brad was smart to transfer the higher card balance to one with a lower rate. However, his credit score likely went down because he closed out his old credit card account. Average Age of Credit accounts for 15% of your score, so new accounts reduce the average age. Therefore, even if you pay a credit card off in full, it is recommended that you do not close the account.
As for Angelina, her $750 payment to an old balance is certainly noble. However, it could actually lower her credit score. By paying off the account, her credit report would reflect recent activity on this old delinquency. The recent active reporting of a delinquent account can be interpreted as a current problem, rather than a 3 year old issue. She should consult with her lender to determine if paying off the old delinquent debt will be a condition for her home loan before she pays it off. The $750 may be more beneficial in the form of down payment rather than paying off old accounts.
If you got one or even both questions wrong, don’t feel bad. As I said, sometimes this is confusing. If you ever have any questions about how to maximize your credit score, please don’t hesitate to contact Anna Kimball, Academy Mortgage.
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