r/CRedit • u/LankyCommission7106 • 7d ago

Mortgage Good debt?

I hear it’s good to have different types of debt to diversify your credit file. When buying a home would it be best to have small amount of debt in each category like revolving and installment debt OR would it be best to have 0 debt?

4 Upvotes

75% Upvoted

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u/inky_cap_mushroom 7d ago

Debt is not necessary to qualify for the best rates on a mortgage. You can do so with only revolving accounts which do not cost any interest.

You should not apply for anything when you are hoping to get a mortgage soon. Hard pulls are scored for 18 months for with FICO 2,4,5. If you want to optimize your credit ahead of a mortgage application you will want to avoid opening new accounts or seeking additional credit.

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u/LankyCommission7106 7d ago

I only ask because I’m debating on paying my car loan off this year and buying a home next year.

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u/ChristineXGrace 7d ago

Paying off your loan will almost certainly cause a score drop (counter intuitive right?!) But, you could pay it down without paying it off completely. That being said, mortgage companies care about your Debt to Income ratio, certain types of loans require less DTI than others.

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u/BrutalBodyShots 7d ago

Paying off your loan will almost certainly cause a score drop (counter intuitive right?!)

It's not when you understand how the system works in terms of risk assessment. Just curious, if you take issue with the potential score drop following the closure of a loan, do you also take issue with the potential score gain from opening one?

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u/[deleted] 6d ago

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u/BrutalBodyShots 6d ago

Sure do. You're saying it's counter intuitive that a score drop would occur from paying off a loan. Am I incorrect in understanding that? If I'm not, please explain what you meant or how I misunderstood. If that is what you're saying, my comment reply stands as-is.

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u/ChristineXGrace 6d ago

The only score gain you get from taking out a loan, is by diversifying your credit. Meaning if you already have loans taken out you don’t need to diversify and you will almost always have a score DROP when taking out a new loan. Then your score improves as the balance on the loan drops down. But then when you don’t owe on it anymore and have successfully and responsibly paid back the full amount, it drops again, regardless of if you have other loans currently or not.

So yeah, that’s counter intuitive. Being punished for effectively not owing money anymore goes against common sense and would not be what people new to credit would expect.

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u/BrutalBodyShots 6d ago

The only score gain you get from taking out a loan, is by diversifying your credit.

That's completely untrue. In fact, diversity of Credit Mix is the least impactful part of taking out a loan... and only even impacts it if you don't already have a loan (open or closed) on your reports. Diversity of Credit Mix is satisfied with the presence of any loan on your credit reports, open or closed.

https://old.reddit.com/r/CRedit/comments/1ga0kew/credit_myth_36_the_more_accounts_you_have_the/

Far more impactful than diversity of credit mix is the impact to the Amounts Owed slice of the FICO pie. There are many misconceptions about why a score drops following the closure of one's only open loan. It's NOT because of a change to diversity of Credit Mix, because that doesn't change when a loan reports closed. It has everything to do with the Amounts Owed portion of scoring and installment loan utilization.

https://old.reddit.com/r/CRedit/comments/1crpuog/credit_myth_11_closing_a_loan_will_tank_your/

Meaning if you already have loans taken out you don’t need to diversify and you will almost always have a score DROP when taking out a new loan.

If you already have a loan on your reports (even if closed) your diversity of Credit Mix doesn't change when you open a new loan. What will change is your installment loan utilization and Amounts Owed. It's that portion of FICO scoring that gets impacted and where the scoring bonus comes from. This is why a score gain is often realized when one opens a loan when they don't have one open already.

Then your score improves as the balance on the loan drops down.

When you cross utilization threshold points for aggregate utilization (most notably, 9.5%) that's correct.

But then when you don’t owe on it anymore and have successfully and responsibly paid back the full amount, it drops again, regardless of if you have other loans currently or not.

Completely incorrect. See the previous linked thread to Credit Myth #11. It all depends on how your aggregate installment loan utilization shifts and if a threshold point is crossed as to whether or not a score change (increase or decrease) occurs. To say it doesn't matter whether or not you have any other open loans shows you don't understand the subject upon which you're speaking.

So yeah, that’s counter intuitive.

Nothing is counter intuitive. We've established that you don't really understand how credit works, at least not pertaining to installment loans. All of your opinions then are based on misunderstandings and misconceptions.

Being punished for effectively not owing money anymore goes against common sense and would not be what people new to credit would expect.

Except that you aren't punished. Credit Myth #11 explains why.

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u/ChristineXGrace 6d ago

You just used a lot of words to agree with me while thinking you disagree with me. I at no point said it was the most impactful part of your credit history. I said if you haven’t had one before, the only initial positive impact to opening a new one on your credit score is because of adding that category overall to your credit profile. So you’re basically filling an empty bucket for the first time, which credit scores like.

I’m not going to bother being as long winded as you, because I can read, you apparently are so blinded by trying to be right, that you cannot.

For instance: me saying the score drop that happens when you pay off the account doesn’t depend on what other loans you have open… is because I’m saying that regardless of if you have an open or closed loan, your credit profile now shows information on installment loans as part of it. So the drop when paying it off isn’t because that TYPE of credit is now paid off.

Best of luck running around yelling into the wind how right you are.

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u/BrutalBodyShots 6d ago

You made multiple inaccurate statements in your post, which I quoted. I never said you said anything was "the most impactful part of your credit history." I used a lot of words because it's important to point out inaccurate information on this sub so that it isn't believed or listened to. 

It has nothing to do with filling an empty bucket as you put it. You don't understand the difference between diversity of Credit Mix and installment loan utilization from Amounts Owed. The links I provided you explain it throughly which should help, because currently you are confused.

I'm not "trying to be right." Everything I've stated is true and accurate, contrary to the multiple incorrect points you made prior.

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u/inky_cap_mushroom 7d ago

You may see a score drop from having no open installment loans, but it’s almost always pretty minimal. You’re unlikely to get better rates from keeping it. Everything above about 750 gets the best possible rates. Keep in mind mortgage lenders will care a lot about your DTI and you will be able to save up a down payment much faster if you’re not paying interest needlessly.

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u/Jesuce1poulpe 7d ago

your credit score, income stability, and down payment will matter much more than having artificial debt diversity. focus on maximizing those instead

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u/0xffd2 7d ago

Zero debt is almost always better when applying for a mortgage. Lenders care way more about your debt to income ratio than credit mix.

Having a small balance on cards can actually hurt because they calculate DTI based on minimum payments. Are you planning to buy soon?

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u/JennF72 7d ago

Your first paragraph was correct but the second was mildly incorrect. Any open end credit lines will be calculated up for a minimum payment no matter if the account has a balance or not. DTI is used but lenders will also take in account for disposable income (DI).

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u/LankyCommission7106 7d ago

I plan to buy in the next year or two. My DTI is around 30%. I can get that lower before then though. Is that a bad DTI ratio?

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u/JennF72 7d ago

30% isn't that bad but what is your disposable income after the 30%? For low income it could make or break the mortgage and for higher incomes, you'll have more in disposable at 30%.

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u/LankyCommission7106 6d ago

Disposable is about $5,500 after bills and expenses.

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u/JennF72 6d ago

You'll be fine then. I'm taking in account you've figured in the cost of the mortgage with this.

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u/[deleted] 7d ago

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u/WhenButterfliesCry 7d ago

Who are you talking to?

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u/The_Chemistry_Guy 7d ago

The voices!

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u/WhenButterfliesCry 7d ago

😂 I seriously scrolled up and down 3-4 times trying to figure out how the comment correlated to the OP's post

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