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Interest only payments - effect on FICO score
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   Types of Loan Programs-> Pay Option ARM, Pick-a-Payment, Cash Flow LoanMessage format
Posted 12/29/2005 12:50 AM (#650)
Subject: Interest only payments - effect on FICO score
I have had an option ARM for about one year (12-MTA index) and have been paying interest only. Except for the initial payment, I have only been paying the full accrued interest due. The principle has not increased, but it has also not decreased. I have been told that my credit score (FICO) will decline steadily due to the fact that the credit agencies will not see any decline in the principle amount. Is it possible to keep this loan and pay interest only for 3, 5, or more years and be certain that my credit will not be damaged?
Jim K
Posted 1/6/2006 1:00 AM (#666 - in reply to #650)
Subject: RE: Interest only payments - effect on FICO score
Your credit will NOT be damaged. This advice you received assumes that credit reports have a memory, and thus know that your balance is not decreasing. They have no memory whatsoever, and your score will be based off of the same factors that effect everyone. If your scenario were true then every time someone bought a home with 80 to 100% financing their score would sink. When one buys a home and pays monthly, interest or principle and interest, his score generally increases. You can hold an Option Arm on 10 properties and your score will likely not decrease as long as you pay in a timely manner. Of course, if you ruin the available-credit to used-credit ratio you'll find your score slumping. But at least you'll own 10 properties!
Posted 2/16/2006 4:40 PM (#783 - in reply to #650)
Subject: RE: Interest only payments - effect on FICO score
OK. First of all. The credit bureaus do have a memory. If you take a look at your credit report, you will notice that your mortgage will show a High balance and a Balance. The High balance is your initial loan amount. The Balance is your current balance on that loan. If the Balance is higher than the High balance then you can tell that the person has an Option Arm and is paying the minimum payment. If they are the same after at least a few months reviewed then they are paying the interest only payment. That being said, this will NOT effect your FICO. The available credit/credit used ratio only applies to revolving credit, definitely not mortgages. Hope this helps.
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