Refinance - Paid Off Debt

[Anonymous]

Hubby and I just refinanced our house (@ 5%) and paid off all of our other outstanding debt as a result.   

1.  How will this affect our FICO score...will it go down with no debt reporting except the new mortgage?

2.  How will the refinance itself affect our score?

[haulingthescoreup]

Hi, welcome to the forums!

If you haven't already, please read Understanding Your FICO ® Score and Credit Scoring 101 (at least the first post.)

These will give you the background knowledge you need to understand what you read here on the forums.

Congrats on killing off your outstanding debt. Possible effect on scores: the re-fi will show as a new account, lowering your AAoA (average age of accounts), so you might get some loss there, and maybe also from the hard inquiries on all three credit reports. If your util (revolving credit utilization; total of amounts on cards owed divided by total of credit limits on cards) was higher than 10% or 20%, you might gain points for lowering your util. This does not include balances on any kind of installment credit, like a car loan.

If you have credit cards, don't close them. They're an important part of your credit profile, and a very important part of your scores. Keep using each of them every other month or so for something you have to buy and would otherwise pay with a check or debit card, like a tank of gas or a bag of groceries. If you like, as soon as the amount shows up on the online CC account, you can pay it off then and there, so that your statements always have a $0 balance, and you never have any CC debt. Small, frequent usage will keep the CC companies from canceling your card. You want to keep a string of clean credit history going and going for optimum scores.

Odd point: most of us find that our scores drop when all our CC's report $0. If you aren't looking for more credit, no biggie --it's generally a 10-point drop max. Otherwise, let one card report a $10 balance on its statement and then pay it off online, so that you never have to pay any interest.

After killing off debt, there's always a temptation to close all your credit cards and live off the credit grid. Do realize that if you do that, you're going to hurt yourself in the long run. If you can maintain self-discipline with CC's, they are wonderful tools --rewards, once a month bill paying, consumer protection, etc. If they cause you problems, though, do what makes it easiest to sleep at night. Just pleeeeease, don't close your oldest credit card. It's so painful when it falls off your credit reports ten (or less) years later, and you lose irreplaceable length of history.

[Anonymous]

Thank you for the response~!

Hubby and I don't plan on using them anymore, but we aren't planning on closing them.  I'm concerned that the CC companies will close them because we aren't using them...especially in the current financial atmosphere. 

My other concern is how the $0.00 balances will eventually affects our scores.  Hubby hopes that the mix of credit we've had, responsible payments and credit history will help....and he hopes that the accounts reporting for several years will help.  I don't know if they'll drop off after so long with a $0.00 balance or not.  I guess we'll see what happens...

thanks again~!

[JoeBJay20]

It would be helpful to use the cards occassionally, if just to buy gas or dinner.  If you go too long without using them at all you run the risk of having the accounts closed due to inactivity. 

Having $0 balances helps your score, although you can eek out a few extra points by allowing one card to report a small balance.  Even if a CC issuer closes your account, you will still have that positive account in your credit history for up to 10 years after the closing date. 

[haulingthescoreup]

It's fine to have $0 balances --that is strictly a FICO scoring issue. The banks don't care a flip about what balance they report to the credit bureaus.

But they do want you to use the credit that they extend, so you need to keep using the cards, in order that that they aren't closed for inactivity. This can be a challenge for store cards, but it shouldn't be difficult for bank cards (Visa, MC, Discover, AmEx.)

For instance, I buy four tanks of gas a month, and I go to the grocery store 2-3 times a month. Whether I had CC's or not, I would have to do these things in order to get to work and back, and to stay alive. If these figures are typical for you, and if you have 6 or 7 bank cards, you can just use a different one for each tank of gas and for each run for groceries. Most cards post the charge on your online account by the next day, maybe two days later. If you don't want to have the balance report, that's fine --just pay it off online when the charge shows up. The card remains active, you don't accumulate credit card debt, you're paying the same amount of money via credit that you would have via cash or check, and you have gas and grocs. A win-win-win-win proposition, and your credit stays fine. In fact, your FICO scores will trend upwards over time, because having multiple credit tradelines reporting strings of clean history month after month results in steadily increasing scores.

That can be a bit high-maintenance on your end, of course. You probably don't have to use every card every month. Generally, every three months is OK, although some banks, especially HSBC/ Orchard, are pretty twitchy this way. They seem to require frequent feeding.

Banks do make money off of your purchases via transaction fees, so even if they're not getting that nice juicy interest from you, regular usage will probably keep them content. If you have any crazy-high CL's, some might wind up being lowered, but that doesn't affect your FICO scores if you don't have balances: $0/ $100,000 = $0/ $100.

Most store cards are happy if you use them every 6 months. Some don't mind if you only use them once a year, for Christmas shopping, for instance, but twice a year is safer.

If and when the time comes that you plan to apply for credit, allow one of your cards to report a balance two months before your new credit app, and then pay it off when it shows up on your statement. Do the same the second month. You'll probably get a one-time score ding for a card reporting a balance for the first time in a long while, but the next month that ding will be gone, which is why I said do it two months ahead. And the damage isn't that much unless you're up in the 800-range --maybe up to ten points --so it might not be critical, depending on where you are.

The important mind-set is to learn to look at your personal credit as a tool: what can it do for you? How can it help your finances (rewards, 0% on major purchases, simplified bill paying, lowered insurance premiums, etc.) Where might it threaten your finances (temptation to start carrying CC debt, etc.) Like any tool, it can help or hurt, so your job is to understand exactly how it works, and remain its master.