Friday, August 13, 2010
Pay Down Car Loan vs. Pay Down Credit Card Debt
I have been working to improve my credit score by paying down my debt so my wife and I can finally buy a home. Last month we were really excited and proud of ourselves for paying off one of our vehicle loans and have been eagerly anticipating the bump to our scores.
As you suggested, we have been subscribed to Equifax's Credit Watch. The other day we received the alert that the loan had been paid in full. We were surprised and extremely disappointed that there was not a boost to our credit score. We can't understand this at all. We paid off one of my wife's credit cards that was maxed out and it boosted her score almost 50 points.
Why didn't our credit score increase? What did we do wrong?
Mike and Kelly
Dear Mike and Kelly -
You did not do anything wrong and in the long run you did something very right.
Your first question was why your score did not increase. Paying down an installment loan such as a car or motorcycle loan, usually results in little or no increase in a consumers credit score. Why? Quite simply, credit scores don't give much weight to a paid in full account. Scores give more weight to timely payments and amount of credit you have available to you. By paying off an installment debt on time or early, you did not extend your payment history or open up any additional credit to yourself, like you did when you paid off one of your wife's credit cards.
This does not mean you did something wrong though. You stated that your ultimate goal is to purchase a home. When purchasing a home there are two factors that lenders that you have control over, your credit score and your debt to income ratio.
By paying down an installment loan (car, motorcycle, etc) you have decreased your debt to income ratio, which is a good thing. Lenders take the monthly debt you owe and divide it by your monthly income to determine your ratio. The lower your debt ratio is, the better you look to a potential lender.
Be sure to speak with your mortgage broker about where your credit score and your debt to income ratio needs to be for the loan guidelines you will be applying for. Together you can come up with a targeted plan to get you where you want to be financially for a smooth and easy loan approval and closing.
Keep up the good work!
One of the most popular credit cards that people trying to re-establish credit are attracted to are the low-limit unsecured credit cards. T...
There are a number of Secured Credit Card Programs out there. Policies and fees vary as well as the approval process for each bank card iss...
A lease purchase agreement is a contract between the buyer and seller in a real estate transaction. Lease purchase contracts are commonly k...
The current economic state of our country has created a boom in the debt collection industry. Many banks and credit card companies are bein...
Dun and Bradstreet operate on a 'fiscal year' as far as their reporting. It doesn't matter if a company incorporates in Septem...
An Energy Efficient Mortgage is a mortgage loan that is funded by a traditional lending institution and is insured by the Federal Housing ...
I have been assisting hopeful homebuyers improve their credit score in the hopes of mortgage approval for over 20 years. The term "cre...
Building business credit is more than obtaining a DUNS number and filling out business credit applications. For business owners of new bus...
Three major mortgage lenders — Bank of America, GMAC Mortgage and JPMorgan Chase — have said they are suspending foreclosures in the 23 st...
In this day and time, I am a big proponent of secured credit cards, this was not always the case. But with large credit card companies tryi...
FTC Required Disclosure
The Federal Trade Commission requires that I disclose any relationship I may have between a product manufacturer or service provider when I write about a product or service.
My intention for this blog is to provide consumers with the knowledge to improve their current personal credit situation. It is the readers responsibility to do additional research and to make responsible decisions based on their own personal financial situations.
My promise to my readers is as follows:
- I am never paid to do a review of a product or service. I do not accept money to review credit cards, credit repair companies etc... When reviewing a product or service, I invest my own time and money to review and test credit products and credit services listed on this site.
- No advertiser will ever influence the content, topics or posts made in this blog. Just because there is an advertisement for a particular product or service on this site, it does not necessarily mean it has been endorsed by the author of this blog.
- If I create a link to a product or service on this site, sometimes I may get paid a commission if you purchase the advertised product or service. These links are included after posts are written, and posts are never composed for the purpose of including advertising.
I feel the rules and practices listed above are just good business in today’s digital world. It is important for you the reader to understand the relationship between the person reviewing a product and the manufacturer or service provider.
If you don’t see a disclosure policy on a blog, that reviewer may be violating the law or at the very least the Code of Ethics.