Credit Scores RevisitedMonday, March 9, 2009

Before I touch on these changes, let me stress that I believe people should strive to be debt free and not rely on credit to purchase consumer goods and services. However, mortgage debt is a necessity and although in time can be paid in full, obtaining favorable mortgage terms is essential to acquiring real estate, and these tips will help ensure you have the best credit score possible and can be eligible for the low mortgage rates available today.

I just wanted to update my last post as the credit scoring models are starting to change. The Fair Issac scoring model has been updated to give less positive scoring marks toward spreading debt loads across multiple trade lines. For instance, I always suggested to clients carrying high credit card balances to balance transfer the debt across a few credit cards in order to keep their balance on each card below 50% of the maximum borrowing limit on that card. Currently, many lenders still use older versions of the Fair Issac scoring model, but over time this will begin to change.

One very interesting and related change is that it is better to be OVER your credit limit than it is to be maxed out. This sounds crazy but here is the reasoning behind this: if you go over your limit and the charge is still approved, this must mean that your creditor believes you are worthy of the extension of additional credit. On the flip side, if you max out your credit and do not get any additional credit extended to you, this makes a creditor view you as less desirable and someone that is not managing their available credit properly.

Finally, to get the maximum credit scoring benefits - it is better to carry a tiny balance on your credit cards then to have them completely paid off and never use them. again, this goes against my belief in being debt free, but if you are trying to keep your credit score high, carry small balances on your cards to keep the trade line reporting positively and current. Once you get approved for your mortgage and have closed on your purchase or refinance, then pay-off the cards. Do not close the credit card accounts if they are in good standing. that will drop your credit score. If you do not want to use the cards, don't carry them or cut them up. But leave the accounts open so they can continue to provide you with a positive credit score.