beachmiles

I have a little extra cash. I can't find any safe investments that guarantee much return. Being an old guy, I only have a small mortgage . It's at almost 6 percent.

If I pay off the mortgage my only debt will be CC. Cars are also paid off.
Will that limited mix of remaining debt hurt my FICO score?

mia

Brief discussion here:

http://ficoforums.myfico.com/t5/Unde...re/td-p/493282

oshelef

Why do you care? What do you need your FICO score for? You aren't about to take out a loan.

beachmiles

Churn credit cards. It's kind of a hobby!

Happy

We paid off our mortgages on the first houses decades ago. The current residence was bought with cash. Cars were bought with cash. Only type of "credit" on our credit reports are the credit cards. The old mortgages had no trace on the credit report when I first pulled a copy to view after the Free Report Once A Year became effective for our state.

It does not seem to have any effect on our FICOs which have been between 765 and 785 range as far as I can remember.

oshelef

Then I highly doubt the very small loss, if any, would mean you wouldn't qualify. Plus, the trade off of having lower outstanding debt would help. The second isn't part of your credit score, but is part of the decision to extend you credit.

scubadiver

Paid off the mortgage, closed the home equity account, haven't had a car loan since 1980. Churn credit cards. FICO 800. I don't think you'll have a problem.

Paying off a 6% mortgage is approximately the same as having a 6% investment. You lose the mortgage interest deduction, gain the interest, and lose tax on the interest.

FlyMeToTheLooneyBin

Depending on how large the interest is and your tax bracket, tax on the interest (from not having the deduction) can be substantial. If you can beat the mortgage interest rate in other investments, it could be beneficial to have some debt. However, if you don't want to have to manage all this and just live debt-free, that's also a good way.

Happy

OP said his age is on the "old" side, and his mortgage is a "small" one.

Unless your mortgage interest is much higher than the amount of Standard Deduction, and you are at a high enough tax bracket such as 25% and above, would carrying a debt at 6% makes sense in current environment.

Let's say the standard deduction is 12,000 just off the top of my head, that means the interest portion that is ABOVE 12,000 would gain incremental benefit.

Let's say your interest is 14,000 a year, ONLY 2,000 would gain incremental benefit. At a bracket of 25%, the saving on the tax is $500. But he also pays out $14,000 a year in interest... The $500 tax saving hardly makes a dent in the $14,000 interest payment for the year.

At the same time, at 14,000 a year interest at 6%, the mortgage balance probably is at the 200K range - that does not nearly qualify a "small" balance... as described by the OP.

If the mortgage interest OP is paying is LESS than the standard deduction amount, then OP has NO incremental benefit in terms of deduction on taxable income, but has a NET loss on interest payment if he has enough money to pay off the mortgage, but the money probably earns less than 6%.

While the stock market has been on an up move since it came off the bottom at 2008, and most recently since Sept 1 of 2010, it has gone up non stop... it is not without risk... While paying off the 6% note, OP has gained 6% on that balance immediately and risk free.

FlyMeToTheLooneyBin

Yes. I read that and understood. I wasn't sure how small the mortgage was. I wasn't saying living with some debt for leverage was right for his situation. Living debt-free is good, too.

The $12000 deduction is for married couples. Can we assume that because the OP is "old," he must be married?

Anyway, if I were in the OP's position, I would think about how much I would be saving and whether it's worth the hassle. I, personally, would just pay it off, even if I lose a few hundred a year. One shouldn't have to manage things in the old age.

reft

One consideration: If you pay off the house, you convert a liquid asset to a less liquid one. Should something suddenly come up it, would take time to get cash back out of the real estate.

This might be a good conversation to have with your tax person. (There's a lot of options here, but trying to stay on topic with regard to FICO score)

One part of a credit rating is making installment payments on time. Paying off early closes a loan so you have one less monthly payment per month as a means of showing you're always and continuing to be trustworthy. If you have enough other items, no big deal.

It sounds like what you have is described as "good, not great credit" due to the lack of using it (few loans). Good as in, you'll get the loan a quarter point of interest higher than 'great' credit.

If you are carrying a balance on the CC, pay it down so your debt:credit limit ratio is smaller. I've heard 1:4 mentioned as a good maximum. That should help your credit rating too.

dnastudios

FICO have just published a web site called scoreinfo.org with information on the FICO score. (and I suppose I should declare an interest at this point.)

I think that in the UK, credit underwriting strategies often take having a mortgage (with no negative payment history) to mean that there is less risk of "flight" of the applicant.

/dnastudios

Happy

OP can always secure a Home Equity Line that can be tapped anytime in case there is an emergency. There is NO NEED to sell your property in order to get cash.

Wrong. As my post above, we have 0 debt and 0 record of any installment payment of loans on our credit report. But I believe even you have to agree that anything above 750 is considered excellent score for any kind of applying credit purpose, because even for mortgage, anything above 750 gets the same rate.

The "argument" normally applies to YOUNG people who do not have a long-established credit file. People freshly out of school, people in the work force less than 10 years, people have very few credit cards in their possession...

Otherwise, the "argument" does not hold any water - it is more like the banks want you to believe, so you would continue to carry a debt - be it a mortgage or a car loan, and pay the interest because you are afraid paying it off would affect your credit score... despite you have the full ability and then some, to completely pay it off... with little and no effect to your credit rating.

Besides, if one does not need to apply for any loan in the foreseeable future, who cares about the great FICO? Good is good enough for OP's purpose of getting new credit cards. He is not in the market for a car loan or a new mortgage.

Hmmm, I would take a big jump to assume other's financial situation ... How in the world you know what OP's credit score may be, and what are the factors affecting it, with the very scanty information OP provided?

reft

Whoa.

One at a time.

By emergency: there's no time to go get approved for a loan. Agreed, if you already have the equity line set up, it may be just as fast, but it's a loan, not an asset.

Agreed, if it's only 'urgent' and if you have a few days, you can go apply for an equity line.

An equity loan, is borrowing from another, it's not an asset you can call your own, and there's no guarantee you can get one when you need it. Even if you have a line, it can be closed without notice. Real Estate is an illiquid asset and if you did have to get cash in a hurry and did not have the equity line as an option, you'd be hard pressed to move it that fast.

It's just a consideration to take into account when taking an asset of one type and making into an asset of another type.

The post said "one part". It did not say "sole determining factor." A FICO score does not take into account assets. It takes into past account payment behavior. Other credit providers use assets, employment income (W2 information or full tax returns.) But OP asked about FICO Score improvement.

In a hypothetical case of a person with 0 debt and 0 record of installment payments on their credit report if they still had credit cards they would have a type of loan that shows regular payment but not one that shows original balance vs current. If that person always paid their CC's off, their debt to credit-available ratio would be high and be factor in a higher FICO score. Want an instant higher FICO score? Ask your credit providers to increase your limit. Your debt to credit-available immediately becomes more favorable. it may actually ruin your ability to get a new loan, because you now have more ability to get into trouble before they can find out about it. But if all this hypothetical person has for debt type are CC's, they aren't showing they can manage different types of debt, (unless they've done so in the past) so a few points may go away. That's not to say that a 750 isn't possible here.

There are 'zero interest' installment loans out there. There may be some bank profit in there somewhere, and they usually only gives these to "supremely qualified" buyers.

Carrying no balance on your CC's is also zero interest. Revolving vs Installment, but still regular payments.

That's not to say that creditors don't say things to get you to borrow money or keep loans. It's how they make money. They are behaving normally for them. Like a shark on a a seal.

FICO Score is an attempt to determine risk, is the creditor going to get repaid? FICO uses past repayment to make their estimate. At the other end, if you have no credit cards or loans, you have no repayment history. Tough to create a score when you have no data. This may be the case you mentioned where the young adult can more dramatically increase their FICO Score in a shorter time via loans that only exist to build credit and not because the cash is needed.

OP said he wanted to raise his FICO Score. He didn't say anything about getting new CC's.

Unfortunately, as to who cares about FICO scores if you are not getting a loan, in some places, car insurance premiums are based on credit scores. Insurance companies found people with poor credit have more claims, cost more, etc. If your car insurance company is using your FICO score, and your jurisdiction allows them to, you have a reason to want to polish it.

In another case, Defense Finance and Accounting Service of the US Gov. was going to suspend some existing employees for bad credit when the economy turned upside for everyone. Bad credit because your house went upside down, your boss fires you for it, is a circular spiral downwards. Legislative involvement got them to back off somewhat.

Credit has been used in the private sector for pre-employment screening. Perfect candidate, poor credit, no job. We're not talking about jobs where employees directly or indirectly deal with cash either. We're talking about an employer trying to reduce risk as much as they feel they can, because if they guess wrong, it's on them. So take no chances and if we were wrong, at least we err'd on our side.

OP said he wanted to raise his FICO. Ergo, it's not 850.

"It sounds like" as posted, are not words of certainty. If anyone could nail down his FICO based on what he posted here they have a stellar future at a bank in loss management. The thorough version of the the post would have been 3 paragraphs with legal disclaimers as to the accuracy, qualifiers like "based on the information you posted here" so forth.

You've been here long enough to know that FlyerTalk is anonymous forum, the TOS advices you not to solely rely on anything said here. It's rather informal, and I think most posters/readers understand that. What lawyers, bankers, CPA's, Doctor's and other officially certified professionals here are not giving official advice either. What's said here does provide any reader with a direction to their their research in, to validate what is said here, find out it's wrong, just not for them.

Happy

There are so much fallacy, misconception and myth in your lengthy post about the assets, installment loans, 0 interest, etc etc, I dont want to spend time to set them straight one by one as they are IRRELEVANT to the very basic question OP has and the reason WHY he has - you completely MISS the WHY.

Here - this is what OP says:

beachmiles
Churn
Quote:
Originally Posted by oshelef View Post
Why do you care? What do you need your FICO score for? You aren't about to take out a loan.
Churn credit cards. It's kind of a hobby!

OP wants to make sure he can get new credit cards AGAIN and AGAIN for the lucrative sign up bonus - that is what he is after.

You said:
OP said he wanted to raise his FICO Score. He didn't say anything about getting new CC's.

See how you completely MISS this part - you said OP is not looking for new credit card... when he clearly is.

May be you have no clue what "Churn credit cards means"?

On top of that, how in the world you would be able to assume OP does not have enough liquid assets? Do you really know anything about setting up a HELC? I seriously doubt posters on this forum would set aside TENS OF THOUSANDS of Cash aside for emergency fund, but a HELC on a free and clear property could be HUNDREDS OF THOUSANDS worth... It is NOT a debt until it is being tapped, but a mortgage is a Bona Fide Debt. I dont know how a HELC would be worse than a mortgage and some idle cash while HELC does not incur maintenance cost but a mortgage is incurring interest payment everyday.

It is so amazing that not only you make some far fetch assumption about OP's financial situation, but you also go in length to the tangent and spit out a bunch of "theories" that do not apply to many people in real world.

Stop making assumption of other's financial situation when you could NOT even understand others post.

There are many many folks dont have any installment loans on their credit reports, with only credit cards that carry 0 balance - may be these are not the "norm" in your theoretical eyes, but they are real people in the real world and their FICOs are in near the 800 marks. Many of them dont need to shop for insurance companies either because chances are they have been staying with the SAME insurance company for Ages and the discount they get, cannot be beat by shopping around.

And if you re-read my post upthread, you will see we do NOT have any mortgage for decades, no car loans, in fact, not a single installment loan EVER shows on our credit reports - but that does not affect our FICO an iota, and we are often shocked by the huge credit lines the Banks doled out on our new cards. Yes, we churn, too. I still remember when we opened new bank accounts with Wachovia, the banker told us "You have so many cards on your report." To that I replied, "but they are all closed by customer requests and in good standing." She said, "Yes, they are." I said, "then it does not matter then." To that she replied, "Apparently not because you two have very hgih scores." I have to chuckle on this.

BTW, there is absolutely no need to "improve" one's FICO to above 800. 850 is almost a fictional number especially if it is the TRUE FICO, not the Vintage, or FAKO or whatever other garden varieties out there.

For all practical purposes, be it a new mortgage, a car loan, a new insurance policy in case your old company dumps you, 750 or above makes NO DIFFERENCE in the best interest rate you can get. Go ask your personal banker, he or she would tell you the same. It is more than enough to get a new credit card with lucrative sign up bonus - that is what the OP is think about!

Finally, FICO is NOT the only determinant factor for you to get credit approval - it is just one of the many important factors in the whole risk assessment process.

Normally I dont really care about argument on FICO for FICO is never a one-for-all magical number that governs credit approval, except the financial industry wants to promote this myth with the media goes along with it. The general public is misled, very often by misinformation like what you posted.

I feel somewhat obligated to dispel such myth because our own situation ihas proven 100% opposite to what you describe about what would affect one's FICO etc etc I also feel it is very wrong to assume others financial "health" with such words:

<<Originally Posted by reft View Post
It sounds like what you have is described as "good, not great credit" due to the lack of using it (few loans). Good as in, you'll get the loan a quarter point of interest higher than 'great' credit.

If you are carrying a balance on the CC, pay it down so your debt:credit limit ratio is smaller. I've heard 1:4 mentioned as a good maximum. That should help your credit rating too.>>

I maintain, how in the world you have any idea what OP's credit rating is? And does it matter about the interest rate when all he wants is to CHURN credit cards because he clearly is not in the market for a loan? If he even has the intention to pay off his mortgage and has means to do so, why would he carry a revolving debt such as outstanding balance on a credit card and pays unnecessary interest? What kind of financial management advice that is?

I think I should stop here else I would be dispensing advices on an internet board even though I do not display my professional designations...