A question about credit scores

[china mom]

I am curious and hope someone who understands how credit scores are calculated can help me.

My credit score dipped due to another hard inquiry. I understand that dip as I have made a home purchase and a couple of refinances in the past 12 months (not all the same house). But one of my factors is this:

Open real estate account balances are too high compared to their loan amounts.

A real estate loan can be a first mortgage, a home equity loan or home equity line of credit. The outstanding balances on open real estate accounts remain high compared to the original loan amounts. People who haven't paid down much of their mortgage or other real estate loans are higher credit risks than people who have.

My question is this. When I do a refinance, I assume that it is resetting my "original loan balance" to the amount of the refinance. So, even if I am not taking any additional cash out, it still looks like I haven't paid down the loan. Am I understanding this correctly?

Hypothetical...I purchase a house for $150K, pay on it for 10 years and my balance is $100K. I refinance the $100K and now my credit dips because I still owe $100K on the $100K loan?

I am not worried about it because my credit is still excellent but I am curios because I have refinanced before and didn't see a dip like this and the refinance I am doing right now hasn't even closed yet.

 

[Cheburashka]

I am curious and hope someone who understands how credit scores are calculated can help me.

My credit score dipped due to another hard inquiry. I understand that dip as I have made a home purchase and a couple of refinances in the past 12 months (not all the same house). But one of my factors is this:

Open real estate account balances are too high compared to their loan amounts.

A real estate loan can be a first mortgage, a home equity loan or home equity line of credit. The outstanding balances on open real estate accounts remain high compared to the original loan amounts. People who haven't paid down much of their mortgage or other real estate loans are higher credit risks than people who have.

My question is this. When I do a refinance, I assume that it is resetting my "original loan balance" to the amount of the refinance. So, even if I am not taking any additional cash out, it still looks like I haven't paid down the loan. Am I understanding this correctly?

Hypothetical...I purchase a house for $150K, pay on it for 10 years and my balance is $100K. I refinance the $100K and now my credit dips because I still owe $100K on the $100K loan?

I am not worried about it because my credit is still excellent but I am curios because I have refinanced before and didn't see a dip like this and the refinance I am doing right now hasn't even closed yet.

I can't answer your question, but will just share that I also bought a house this year, and afterwards my credit score dipped slightly, as well. I didn't really understand why, but the bolded part of your post explains it. Thanks for the info.

 

[EACarlson]

Loan balances, whatever they are for, are counted for utilization both individually and all together. Either of those being above 30% can lower scores. When you open a new loan you will normally see a score dip, how much and for how long depends on many factors in the algorithm. The only sure way you won't is if it is the only open loan on your report, then it will normally be a score increase since you added "credit mix" to your positives. In general it stops being a penalization two years after the loan is opened.

 

[AvidDisReader]

There are multiple factors that go into a credit score. One of them is the Percent of balance to high credit. Strange but true, if you have say 10 credit cards and you decide to close a couple since you do not have a balance and you do not use them. This will hurt your credit score since it is considered a positive that there is no balance and when you compute all accounts with the open balances. The percent will be lower than if you close the 2 accounts and take away the high credit from the equation with zero balance. Again this is just one factor, years of credit history, delinquent credit- how recent has there been delinquent credit are other factors. Something that is not often mentioned, several years ago the credit agencies drastically reduced the negative effect of Medical collections on a persons credit score.

 

[Cheburashka]

Loan balances, whatever they are for, are counted for utilization both individually and all together. Either of those being above 30% can lower scores.

Most homebuyers don't put 70% down on their homes, so I guess that means most people who buy could expect a slight dip? I put very little down on my house, percentage-wise, due to extreme home price inflation & the fact that I live in one of the hottest markets in the country as far as demand is concerned. Nevertheless, the post-purchase credit score dip was small: maybe 10 -20 points depending on which agency you look at. Not a big deal when you have excellent credit.

I think they weight mortgage utilization differently from credit card utilization. If my credit cards (I pay the balances every month) were maxed out to the level of my mortgage, I'm sure my credit score would be a lot lower.

 

[kdonnel]

As long as your FICO score is >=720 it doesn't matter that much. That is the threshold that will get you the best rates. There might be very slight differences in rates offered between 720 and 850 but probably not enough to really matter.

Keep in mind your FICO score can vary across bureau. Not all of your credit information is reported to all three bureaus. It might be 720 using Equifax data, 730 using Experian and 715 using TransUnion.

Also keep in mind that 90+% of credit decisions are made using your FICO score from one or more of the bureaus.

All the other scores out there really don't mean anything.

For example the VantageScore is commonly what is shown by credit card portals. It uses a different model than FICO and will have a different score using the same data. It also combines the data across all three bureaus giving a single score.

 

[EACarlson]

Most homebuyers don't put 70% down on their homes, so I guess that means most people who buy could expect a slight dip? I put very little down on my house, percentage-wise, due to extreme home price inflation & the fact that I live in one of the hottest markets in the country as far as demand is concerned. Nevertheless, the post-purchase credit score dip was small: maybe 10 -20 points depending on which agency you look at. Not a big deal when you have excellent credit.

I think they weight mortgage utilization differently from credit card utilization. If my credit cards (I pay the balances every month) were maxed out to the level of my mortgage, I'm sure my credit score would be a lot lower.

Even if they did put 70% down that wouldn't change the fact that the new loan is still 100% utilization. This is one of the reasons that "perfect" 850 FICO 8 scores are so rare. Probably a quarter of the people here would have 850s if their mortgage was older than 10 years and paid down to 8.9% or lower.
Yes, loan utilization is weighted differently than revolving utilization.
The post purchase ding is the combination of the new loan reporting 100% utilization and the Age of Newest Account being reset to zero. How long it's been since a new account has appeared on your report also affects how big that ding is. You will often see changes when accounts hit anniversaries, even if nothing else has changed. This is why you will see a score ding when you get a new card, even if it's reporting a 0 balance.

 

[GreatLakes]

I am curious and hope someone who understands how credit scores are calculated can help me.

My credit score dipped due to another hard inquiry. I understand that dip as I have made a home purchase and a couple of refinances in the past 12 months (not all the same house). But one of my factors is this:

Open real estate account balances are too high compared to their loan amounts.

A real estate loan can be a first mortgage, a home equity loan or home equity line of credit. The outstanding balances on open real estate accounts remain high compared to the original loan amounts. People who haven't paid down much of their mortgage or other real estate loans are higher credit risks than people who have.

My question is this. When I do a refinance, I assume that it is resetting my "original loan balance" to the amount of the refinance. So, even if I am not taking any additional cash out, it still looks like I haven't paid down the loan. Am I understanding this correctly?

Hypothetical...I purchase a house for $150K, pay on it for 10 years and my balance is $100K. I refinance the $100K and now my credit dips because I still owe $100K on the $100K loan?

I am not worried about it because my credit is still excellent but I am curios because I have refinanced before and didn't see a dip like this and the refinance I am doing right now hasn't even closed yet.

You are correct. A refi essentially puts you back owing 100% of the original balance. Owing 100,000 on a 100,000 loan is less favorable than owing $100,000 on a $150,000 loan.

The exact number of your credit score is pretty meaningless, what matters is the tier you fall in. If the tier is 800+ for A+ then it doesn't matter if you are 800 or 850. That is also a very aggressive top tier, most will go down to 750 or 720.

Lastly, the FICO score is only part of the calculation. A great example of this is closing credit cards you don't use. It will hit your score but at the same time it is viewed more favorable by a lender because they have less competition for your loan payment dollars. Someone with $200,000 in available credit card debt but no balance means if they have a sudden change in circumstances they can charge up $200,000 in debt quickly and that debt competes with the loan I am about to make you. Very few loan decisions beyond credit cards are made just on FICO scores alone. Even automated decisioning engines have more than just the FICO score weighed.

 

[Luv Bunnies]

Our score has slowly gone down by 15 points since we paid off our mortgage over two years ago. We sold a house, paid off the mortgage and paid cash for a smaller house. We have no car loans and pay off our credit card every month. Basically we are barely using any form of credit, which caused our score to go down. Our score is still in the "excellent" range and we aren't planning to take out any loans. I understand why it's happening, it just seems counter-intuitive.

 

[china mom]

Thanks for all the input. I kinda figured that was how it was calculated. As I mentioned, my credit is still excellent but it was disappointing to see it dip below 800.

We refinanced out primary in May 2021
We purchased an investment property in March 2021
and we are currently refinancing a different investment property now

Additionally, we purchased two houses in Aug 2020 so we will have five loans at just about 100%. But, if you were to look at our value versus the t original purchase price, we have paid off about 30% of our original loan amounts. And we have about 50% equity based on current appraised values. It is a shame the algorithms can't calculate that.

Of course, it is a moot point since my husand has banned me from buying any more houses for a while so I don't need to worry about my credit score

 

[celebun]

Thanks for the information

 

[Dan Murphy]

Sorry for bumping the thread! From what I understand, a refinance can indeed impact how your credit score assesses your real estate accounts. It might be seeing the new loan as the "original balance," which could make it seem like you haven't paid down the loan. The dip you're noticing could also be temporary, and once the new loan is recognized and your payment history is updated, you might see a rebound in your score.

Welcome to the dis, cele. And Happy Thanksgiving!

 

[DCLMP]

I've had an 840 credit score for a couple of years. I churn through credit cards all the time for points. Sometimes it dips a little when I apply for a new card. If you use credit and pay your bills on time then you'll have a better credit score

Utilization matters on revolving debt like credit cards, but it doesn't matter on secured debt.

People have this misconception that if you have a lot of credit cards and use them it hurts your credit, but it's actually the opposite. Using credit cards paying them off every month and keeping utilization low will help your credit score. My utilization is normally around 7% if that helps. You want to make it look like you use credit responsibly having a low utilization is better than none.

A mortgage is not figured into utilization nor is a car loan that would be secured debt. It's an asset that can be seized if you default.

It used to say that on my credit report {the mortgage balance}, but it didn't affect my score. I think the inquiries are probably the biggest hit to your credit score and that should improve in time. Even with an 840, they'll tell me stupid stuff like you have too many balances on too many cards.. um ok, who cares.

 

[china mom]

I was the one who started this thread two years ago and am enjoying the new responses. My score is in the excellent range and the needle moving 20 or so points has no effect on me as I am still in the excellent range. But, I watch it like a hawk becaus:e

a) I am competitive and try to see how high I can keep it
b) I am curious about how the world works
c) I like to tease my friend by saying things like "oh, no, my score is in the toilet, it dipped below 800. You have to understand our friendship and his climb back up from bad credit to appreciate why this is funny, but it is.

I am happy to report that whether it was the refinancing or the credit inquiries, time has been kind and my score is no longer "in the toilet".

I do see a slight dip or increase depending on what my credit card balances are the day they take the snapshot despite paying them off completely every month. I requested to raise the limit on one of my cards - not that I will ever come close to the limit I had, but just to see the effect. Sure enough, it got me a bump in score.

 

[EACarlson]

A mortgage is not figured into utilization nor is a car loan that would be secured debt. It's an asset that can be seized if you default.

It used to say that on my credit report {the mortgage balance}, but it didn't affect my score. I think the inquiries are probably the biggest hit to your credit score and that should improve in time. Even with an 840, they'll tell me stupid stuff like you have too many balances on too many cards.. um ok, who cares.

This is flatly untrue. Balance to loan origination amount is a component in FICO scores. Both individually and overall. This is a different calculation than revolving utilization. The thicker the file the less it affects the overall score but it is still there. A relatively thin file can see differences of as much as 25 points between a loan with a 95% balance compared to a loan with a 9% balance. One of the tricks that is recommended is that if you don't have a fixed value loan is to open a Share Secure Loan and immediately pay it down to 9%.

 

[robinb]

It used to say that on my credit report {the mortgage balance}, but it didn't affect my score. I think the inquiries are probably the biggest hit to your credit score and that should improve in time. Even with an 840, they'll tell me stupid stuff like you have too many balances on too many cards.. um ok, who cares.

My credit score is slightly less than yours, but I have you beat on dumb credit score stuff. My homeowner's insurance made a soft pull on my credit score and said that I had:

(1) Too many revolving accounts that have not been in a past due status for 60 days of longer (what? I pay off too many accounts?)
(2) My average balance was too high compared to my available credit (less than 5%, BTW, and paid off monthly so I don't understand that one either.)
... and my personal favorite ...
(3) Your oldest account was opened within the last 32 years. Having your oldest account over 49 years is the best.

WHAT THE ACTUAL HECK? Has anyone bothered to tell them that women could not even allowed to apply for a credit card separate from their husbands more than 49 years ago?!?! In any case, I was in elementary school 50 years ago ... shame on me for not having a credit card in elementary school!

 

[DCLMP]

This is flatly untrue. Balance to loan origination amount is a component in FICO scores. Both individually and overall. This is a different calculation than revolving utilization. The thicker the file the less it affects the overall score but it is still there. A relatively thin file can see differences of as much as 25 points between a loan with a 95% balance compared to a loan with a 9% balance. One of the tricks that is recommended is that if you don't have a fixed value loan is to open a Share Secure Loan and immediately pay it down to 9%.

It’s a component of your credit score, but it’s not part of the utilisation that they tell you you’ve used. I was only referring to revolving. It also seems like being over the 30% on one card can be detrimental even if you are only at 5% across all cards.

 

[DCLMP]

My credit score is slightly less than yours, but I have you beat on dumb credit score stuff. My homeowner's insurance made a soft pull on my credit score and said that I had:

(1) Too many revolving accounts that have not been in a past due status for 60 days of longer (what? I pay off too many accounts?)
(2) My average balance was too high compared to my available credit (less than 5%, BTW, and paid off monthly so I don't understand that one either.)
... and my personal favorite ...
(3) Your oldest account was opened within the last 32 years. Having your oldest account over 49 years is the best.

WHAT THE ACTUAL HECK? Has anyone bothered to tell them that women could not even allowed to apply for a credit card separate from their husbands more than 49 years ago?!?! In any case, I was in elementary school 50 years ago ... shame on me for not having a credit card in elementary school!

Well I think they have to come up with something. Lol

 

[EACarlson]

It’s a component of your credit score, but it’s not part of the utilisation that they tell you you’ve used. I was only referring to revolving. It also seems like being over the 30% on one card can be detrimental even if you are only at 5% across all cards.

All accounts utilization, (revolving, fixed, individually and by type) are considered with scoring marks at 10%, 30%, 50%, 70%, 90% and 100%. Any time your reported balance crosses one of those thresholds there is the potential for a scoring change. How many things are on your credit report and how far back your report goes determines how big that change is. Could be 1 point, could be 200 points.