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Extra Credit for Paying Credit Cards in Full

Oct. 27, 2016
Credit Score, Home Affordability, Mortgage Process, Mortgage Rates, Personal Finance
Extra Credit for Paying Credit Cards in Full
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Paying your credit card balances in full has always been the smart way to use plastic. Now it can help you get a mortgage, too.

Starting Sept. 24, mortgage buyer Fannie Mae required that lenders use credit card payoff information, known as trended data, in all new home loan applications when payment amounts are available. (They aren’t always, but more on that in a moment.)

Fannie Mae says trended data, which isn’t included in traditional credit scores, will help more people get mortgages. Credit experts are touting the addition of the data as the biggest change to the mortgage underwriting process since credit scores were first included in 1995.

“The value of the data is indisputable,” says credit expert and fair credit reporting consultant John Ulzheimer, who has worked for credit bureau Equifax and leading credit score company FICO.

Can’t hurt you, can help you

Researchers discovered a few years ago that people who regularly pay off their cards are far less risky than those who don’t. Studies by Fannie Mae and credit bureau TransUnion found “revolvers” who pay only the minimums are much more likely to default on loans than “transactors” who pay in full.

About 42% of U.S. consumers with credit cards don’t carry a balance, according to a 2014 study by the Boston Federal Reserve.

Traditional credit scores don’t reflect whether you’re a revolver or a transactor. The FICOs and VantageScores used in most lending decisions reflect how much of your available credit you recently used, rather than how much of those balances you subsequently paid off.

Trended data, by contrast, can show your pattern of payments over time. The latest version of Fannie Mae’s underwriting software, Desktop Underwriter 10.0, uses up to 24 months of payments data supplied by Equifax and TransUnion credit bureaus. Experian plans to add its trended data to the program “in the near future,” says Paul DeSaulniers, the bureau’s senior director of risk scoring, trended data solutions and collections.

The good news for revolvers is that their behavior won’t keep them from getting a mortgage. Payment patterns can be used only to help borrowers get approved, not as a reason for denial, says Mindy Armstrong, the senior product manager in charge of Fannie Mae’s automated Desktop Underwriter software.

Fannie Mae’s mortgage risk assessment depends on a number of factors, including the size of a borrower’s debt payments relative to income (debt-to-income ratios), how much equity a borrower would have in a property (loan-to-value ratios) and how much savings the borrower has accumulated (known as reserves). Trended data won’t help people who are clearly bad risks. But some on the mortgage-approval borderline who might have been declined in the past could get approved if they have a reported history of paying their credit card balances off, or at least down, Armstrong said.

A gold mine for marketers

Missing data won’t hurt borrowers, either.

“If we have it, we’ll use it. We won’t penalize people when it’s not there,” Armstrong said.

That’s fortunate, since trended data reporting is still pretty spotty. Some credit card issuers only recently started telling the credit bureaus how much people pay each month. Some don’t share the information at all — probably for competitive reasons, Experian’s DeSaulniers says.

Payment information also helps lenders decide which borrowers to court and how. They use it to distinguish the person who charges and pays off $5,000 each month from the one who carries a $5,000 balance, paying just a $200 minimum and then charging another $200. The two borrowers look the same to traditional credit scores, but the trended data show that the first borrower not only handles credit more responsibly, but also likely has a lot more discretionary income, making her a more desirable customer.

“If you have the financial wherewithal to make a $5,000 payment every month, that says something about your ability to repay,” DeSaulniers says. “If you were, say, American Express Platinum, you’d want to know who the $5,000-a-month customers were.”

Meanwhile, someone who pays more than the minimums but still carries a balance would be attractive to issuers who want to float him low-rate balance transfer offers, DeSaulniers says.

Are you a revolver or a transactor?

To find out if your issuers are reporting trended data, you need to pull your credit reports from (Credit reports from other free sites may not include this data.)

Look in the account details for breakdowns that show the balance owed, minimum or “scheduled” payment and “amount paid” or “actual payment amount.” An informal survey of NerdWallet co-workers found several store-branded credit cards, such as those issued by Target and Amazon, reported payment data, while many national issuers did not.

People can dispute inaccurate information on their credit reports, but they can’t force issuers to report trended data. Creditors aren’t required to report anything to credit bureaus and certainly not details they don’t want to disclose.

Credit bureaus could help matters by leaning on credit card issuers to cough up the numbers, but bureaus’ influence is limited by issuers’ desire to play along.

“The credit bureaus could clearly incentivize their army of [data] furnishers to report the information,” Ulzheimer says. “But at the end of the day, it’s the card issuers’ choice whether or not they want to do so.”

Liz Weston is a certified financial planner and columnist at NerdWallet, a personal finance website, and author of “Your Credit Score.” Email: [email protected] Twitter: @lizweston.

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