It’s that time of year again when I pull my credit reports and review my credit score. One of my on-going goals has been to improve my credit score so that when the time comes to purchase a house, I can get approved at the lowest possible interest rate. So far, my score has been consistently improving. However, using various methods to check my overall credit health, I came across a grading system a few sites like Credit.com and CreditKarma.com use to explain why my score is what it is.
A credit score is determined by a few factors:
- 35% is based on payment history – I score a B in this category. Just a few late payments a few years ago dinged me in this area.
- 30% is based on credit to debt ratio – I have an A+ here.
- 15% is based on credit age (the older the better) – I have an A+ here as well.
- 10% is based on the types or mix of credit – I scored an F in this category (see my rant below).
- 10% is based on inquiries – I scored an A- here.
All of my categories look pretty good, except the credit mix. I’ve always been an “A” student, so seeing an “F” in one category made me see red. Using Credit.com, each section has a description that explains the possible reasons I received a particular grade in each category. Examining my credit mix, the only reason I could determine I scored an “F” is because I don’t have a mortgage. Here is an explanation from Credit.com in the credit mix category:
I’m sure that the amount of student loan accounts don’t help (and it’s really not 11 – they’ve just been bought, sold, and rebundled a few times). However, the description states, “…consumers who have mortgages are more stable than consumers who do not.” Oh, really?!
I don’t think I can completely agree that homeowners are more credit worthy given the whole housing boom fiasco. During the peak housing boom years, pretty much anyone who applied for a home loan got one – and without their 20% down payment. Now, we’re seeing the repercussions – people are short selling and foreclosing at a higher rate than ever before. I’m pretty sure that these “home owners who secured a mortgage” aren’t more stable than me who has been paying rent on time for years (and years).
Let’s replay this – during the housing boom, a potential home buyer didn’t have to have stellar credit. These less than stellar candidates were granted home loans they really couldn’t afford. Now, many of them are foreclosing and short selling their homes and some are living mortgage free until there homes are sold or the bank kicks them out (Squatter -a person who settles on land or occupies property without title, right, or payment of rent.) Now as a renter, if I were stop paying my rent, I’d be given 30-90 days before I had to leave, not months upon months of mortgage free living. Aren’t I, the renter, the more stable consumer?! Don’t my years of rental payments count for something?! Why is it that rental payments aren’t factored into credit worthiness and therefore counted towards my score?
I’m not saying that people who are in precarious financial situations (such as a job loss or unforeseen medical bills) deserve to be bullied and picked on for foreclosing – sometimes bad things happen to good people. My rant here is that renters who pay their rent on time for years should be considered credit worthy. Somehow rent payments should be factored into a credit score.
What do you think? Should on-time rental payments be counted towards a credit score? Are home owners really more credit worthy than renters?
I know what you mean LH and I totally agree even though I’m on the other side of the fence! My credit score went from 7XX to 8XX once I went from debt-free to taking on a mortgage!
Truly a twisted world!
@MoneyCone – I’m sure once I purchase a house, my score will zoom. But just seeing that I got an “F” in account mix makes me mad! Renting should count for something!
While I don’t think it should matter for the reasons you listed, I think your best bet is just to worry about the number since that is what is usually looked at.
Also, remember your Debt to Income Ratio before trying to get a mortgage (I learned that one the hard way 4 or 5 years ago LOL)
@Evan – You’re right. It’s not like a mortgage broker is going to deny me a mortgage because I don’t already have a mortgage. 🙂 I’m looking at my overall score, which is also strange because depending on which vendor I pull it from, it varies! (another to be written post!)
I know my FICO score, but I do not think about it very often. If you handle your financial responsibilities well it takes care of itself. Does home ownership affect the score? Yes, because lenders see home ownership as making you more creditworthy despite the recent housing bubble issues.
@Krantcents – I’ve seen my score improve by 100 points over the past two years by being financially responsible. But I think the way the bureaus calculate credit worthiness is a little screwy. Paying rental income for years on end should count towards something!
Other closed-end (installment) loans can also increase your credit score. A car loan, for example, is one great way to increase, provided all payments are made on time.
@Christa – It’s funny you mention that. My husband has an auto loan (that’s almost paid off) and he too scored an “F” in account mix. It’s as if you can only improve your score in this area if you have a mortgage. What crap is that!?
As an extremely biased renter, I agree that paying rent on time should be considered just like a mortgage is. I guess the different is that paying rent doesn’t involve paying a loan (although it is a contract).
@Jeffrey – You make a good point; rental payments aren’t paying down a loan. However, they should be counted towards something. 😉
I think your rant is well justified. Coming from a credit analyst background, most thinking analysts would look at a mortgage application from a renter and check the references. In this instance, your on-time payment history is definitely incorporated into their decision. Credit scoring systems have their flaws, no question.
@Hunter – Well it’s good to know that my on-time rental payments will count towards something!
Your logic makes sense only the problem is that mortgages and credit are judged by someone thousands of miles away whom you have never met. You are simply a piece of paper. There are responsible and dead-beat renters and responsible and dead-beat home purchasers. Being responsible as a renter should count for something, but doesn’t.
@Cash Flow Mantra – I’m just a piece of paper. *sigh* that’s very enlightening. 😉 But you’re right; being a responsible renter should count towards my credit score in some way.
I got an F in that section, too. 🙁 It’s because I have only a credit card (2 on the report, actually, but only one active) and student loans.
The part that annoys me is that your goal is to get a mortgage, but your score won’t improve unless you HAVE a mortgage. So frustrating!