Shopping, Cash and Your Credit Score

By Neil Funsch

Cha Ching! … went the cash register. “Cash or check?” Echoes of bygone holidays, and then along came the era of the Chargers. Not the smirking Philip Rivers’ version, but the plastic versions. Visa, Master Card and Discover gremlins promising easy shopping – a slippery slope to bad credit and worse. Right? Well maybe.
The use of credit is something we are more aware of as we make purchases during the holiday season. In my business I meet with client confusion regarding the use of credit and their mortgage credit scores. The truth surprises most people. Carrying a zero balance on your credit cards will not give you the best credit score. Neither will paying cash for everything nor living debt free.
Your credit score is designed to help the people who are considering lending you money predict the likelihood of repayment. Your score is designed to show how well you handle credit, not that you are so well organized or disciplined as to never use it.
What then is the optimal credit mix or profile? Your credit score is built on five components, each bearing a relative weight or importance. From lowest to highest they are:
Type of credit accounts (revolving debt, including credit cards and installment/mortgage/auto loans): 10 percent
Here lenders want to see if you have experience handling different loan types, especially the one you are applying for. You should have one installment and two to three credit cards for an optimal score.
New credit: 10 percent
Have you been loading up on credit recently? Whenever someone takes on new credit they are potentially riskier, so each new credit that’s opened will initially lower their score. So know where you stand before opening up the new J.C. Penny card to get an additional 10 percent off, if you are considering a mortgage in the near future.
Length of credit history: 15 percent
The best credit is old credit. This is important if you want to get the perfect credit score. How old is old? 61 years. As with the two preceding factors, not a huge factor but they all add up. So keep your old cards open.
Amount Owed: 30 percent
Balances owed as a percent of available dollar limit. Here is the big surprise: The optimal rating is achieved with balances below 10 percent on multiple revolving credit cards. You have to use credit in order to demonstrate your ability to manage it. On your installment loan the balance is not as important.
Payment history: 35 percent
Do you pay on time? It is important to realize these factors are all interrelated. Someone who has a long history of successfully managing their debt will not be negatively affected much by opening a new account while someone who has missed many payments will be.
Cha Ching!
Neil Funsch has been a mortgage broker for 18 years, the last four in Park Hill. He can be reached at 303-229-2684 or neil.funsch@gmail.com.