I review credit reports every day. I see the good, the bad and the ugly and work with clients to do certain things to quickly boost scores in order to get approved for a loan. Over the years I have built a working knowledge of what makes for great credit scores and what sends scores tumbling down. In the mortgage industry, I would classify great credit as 740+, good credit as 700-740, and average credit as 660-700. Often times, your fico score can make the difference between whether you qualify, but also a .125/.250% difference in interest rate. Not having the best score possible can be very costly on your mortgage.
There is one common mistake I see people making time and time again. It’s one of those things that goes against conventional wisdom. I did it myself years ago.
Paying off and closing credit card accounts, especially the ones that are older, can actually hurt your scores.
Why? Assuming these accounts are in good standing, they carry more weight because of their age. So the credit card that you have had for 5-10+ years, is your greatest potential for building top notch credit. The longer a credit account has been open and has a history of responsible use, the greater positive impact it can have on your scores. Sometimes just using an old credit card by making small charges, thereby re-activating a good and longstanding account, will quickly boost your scores.
The credit bureaus, look at many things, but aside from not being late or delinquent on your payments, the second biggest factor is called proportion of credit balances to limits. This is to say you want credit open and available but you don’t want to run a high balance on it month after month. Maybe use 10-25% of the credit limit every month and then pay it down consistently.
The chart below is a good indicator of what makes up the credit scoring model, but closing older, good standing credit accounts, hurts the credit profile in several categories. I personally believe that closing credit account also hurts the scores in the payment history category, because active accounts may very well carry more weight there than closed ones.
About the Author ~ Since 2003, Beau has been a mortgage professional and is a leading best broker in San Diego. As Founder and Senior Mortgage Advisor at Transparent Mortgage he is truly committed to serving the needs of his clients and raising the industry standards for integrity and transparency.
Questions, Comments, or Personalized Rate Quote? Contact Beau today: 619-888-3606 or firstname.lastname@example.org