Just about everyone has debt of some sort. Debt doesn’t just affect how much money you have left at the end of the month, it also influences your credit score when you’re ready to buy a home. To learn how your outstanding balances play a role in your score, it’s important to know what revolving and fixed debt is. 

 What is Revolving Debt?

Revolving debt is when the amount you owe can vary depending on how much money you borrow. This type of debt is also special because you don’t have to pay off the full balance each month; you can pay a portion of your bill, just as long as you make the minimum payment. It goes hand in hand with revolving credit, which means you have a line of credit you can access without going through an application process each time you borrow money. The interest rates for revolving credit accounts tend to be high (in the double digits), as there’s usually nothing to serve as collateral if you default.  If you use a credit card, then you’re already familiar with revolving debt. The balance on home equity line of credit (HELOC) can also be considered revolving debt if you’re still in your draw period.

What is Fixed Debt?

Fixed debt is the opposite of revolving debt, since the amount you owe each month changes very little, if at all. Fixed debt is associated with installment credit, where you’re borrowing a set amount of money and paying it off using a repayment plan. Once you’ve been approved for the loan amount, you can’t keep borrowing money unless you apply for another loan or restructure your existing one. There’s a certain time frame where you must pay back the funds. Interest rates for installment loans are usually lower because there’s collateral to back the loan. Common examples of fixed debt include mortgages, car loans, student loans, and personal loans.

Effect on Credit Score

Revolving debt and fixed debt differ in how they’re structured, and they impact your credit score slightly differently. Most mortgage lenders use the FICO credit score model, and it is calculated using five key factors: credit utilization (35%), payment history (30%), credit history (15%), new credit inquiries (10%), and credit mix (10%). Note that credit utilization and payment history together account for over half of your score—it’s nothing to sneeze at! 

Fixed debt has a larger effect on your payment history. Even if you have a high balance on your loan, it will have a minimal effect on the credit utilization aspect of your score. Staying on top of payments will help any installment debts from bringing down your credit. On the other hand, revolving debt primarily affects both your credit usage and payment history. If you’re using a high percentage of your available credit or not making timely payments, it can cause your credit to take a hit. It’s recommended to keep your credit utilization ratio under 30% to appear less risky. Credit card accounts are notorious score damagers, so it’s important to keep them in check.  

Understanding how these types of debt can affect your credit score can allow you to be more strategic to raise your score (and reduce your debt.) Consistently having good credit habits will improve your credit health in the long run. Not having a “perfect” credit score or being debt-free shouldn’t disqualify you from becoming a homeowner. A financial advisor can guide you through debt management, and a Loan Originator can work with you to find flexible options that fit your needs. 

Disclaimer: NFM Lending is not a credit repair agency, financial advisor, or debt specialist. You should consult a financial advisor if you have any questions about your unique financial situation.

You probably already know that credit score plays an important role when buying a home, but understanding how credit affects your ability to buy a home goes beyond a simple number. Let’s breakdown some of the most common credit questions from aspiring homeowners.

Will it help my credit score to close a credit card I’m not using?

You might think closing a seldom-used credit card will improve your credit score, but this is the last thing you should do. When you close your credit card, you’re reducing your available credit, which will drive down your score. Instead, use your card for small purchases every now and then and pay it off in full. Consider designating it for minor recurring payments, such as a subscription service. Doing this will prevent the bank from closing your account for inactivity and can benefit your score since you won’t carry a balance.

What’s the difference between a FICO score and the score I get from free credit score sites?

You’ve probably seen ads for sites that let you check your credit score for free, but they don’t always paint a full picture of your credit health. If you’ve relied on the information from one of these sites, it may come as a surprise if your lender reveals a credit score that’s very different. FICO is the primary model mortgage lenders use to review your credit, but some credit sites use a totally separate model called VantageScore. Since FICO scores and VantageScores are calculated differently, there can be a sizable disparity between the numbers. For home buying purposes, it’s better to refer to your FICO score. To get your free FICO credit score, visit the Experian site.

Will it hurt my credit score to apply with other lenders?

When you find a lender to get pre-approved, they’ll perform a hard credit inquiry to get a detailed look at your credit situation. A hard credit pull will slightly decrease your score because your credit report is being accessed for application approval, but soft credit pulls (like checking your credit score) won’t affect it. The drop is usually 5-10 points, and your score will rebound in a few months if there are no negative changes to your credit. If you still aren’t sure which lender to choose, you’ll have a 3 to 4-week window where any hard mortgage credit pulls will be counted as a single inquiry and won’t further reduce your score. If your credit goes through another hard inquiry after that timeframe, it will affect your score. 

What’s the quickest way to increase my credit score?

Increasing your credit score is like working out—you won’t see the results you want overnight. The best way to improve your credit score is to establish and maintain good credit habits.

Paying bills on time may not sound like a huge deal, but payment history accounts for a whopping 35% of your FICO score! Consistently making timely payments will increase your credit score and make you seem more reliable as a borrower. Keep in mind that making the minimum payment will prevent your score from falling if you’re tight on funds, while paying it in full will have a larger impact on your credit.

Just because you’re able to pay with credit doesn’t mean it’s a good idea to use all of it at once. The percentage of how much credit you’re using in relation to available credit is called your credit utilization ratio, and it accounts for 30% of your FICO score. When you’re close to your credit limit, it hurts your score and makes you appear financially risky. Aim to keep your utilization ratio low and use around 30% of your available credit. You can determine your ratio by dividing the total credit limit of your credit cards by your total balance and multiply that number by 100.

Paying down debt is another way to improve your score. It will also reduce your debt-to-income ratio (DTI), which will increase how much you can afford for a home.  Pay special attention to debt with high interest, as it will accumulate rapidly.

I’m not planning on buying a home right now, but how can I financially prepare when I’m ready?

Even if homeownership isn’t in your immediate future, it’s never too early to put yourself in a solid financial position for when the time is right! Improving your credit worthiness will play a significant factor in being able to buy a home, but there are other areas that are important, too.

The period where you’re gearing up to buy is an ideal time to start a home savings fund. If you can put a portion of your paycheck into savings each month, the amount will grow over time. You might also want to create a budget to manage your expenses and see where you can cut back. While the “requirement” of needing 20% down to buy a home is a misconception, it’s wise to have a solid level of savings when you apply for a mortgage. In addition to reducing existing debt, avoid taking out new, unnecessary debt. This doesn’t necessarily mean you need to be debt-free to buy a home, but having fewer debts means a lower DTI ratio and more purchasing power.

There are numerous myths about credit out in the wild, and it’s easy to believe them if you’re unfamiliar with how credit scores work. When you have a basic understanding of best credit practices, you can be better prepared when you apply for a mortgage.

If you have any questions or want more information about loan programs, contact one of our Licensed Mortgage Loan Originators. If you are ready to begin the homebuying process, click here to get started!

NFM Lending is not a credit repair agency, financial advisor, or debt settlement company.

It’s never too late to make a change in your life, and getting your credit score in order is an excellent resolution to set for yourself. A healthy credit score has numerous benefits, especially if you want to buy a home in the future. Here are 5 credit resolutions to make (and keep).

1. Pay Bills on Time

Making sure you pay your bills on time is one of the simplest ways to improve your credit score, but it can also be one of the easiest things to forget. Payment history makes up 35% of your FICO score, and missed payments, especially frequent ones, can seriously damage your score. To avoid missing an important bill, consider setting up autopay so you’ll never forget. If you set up autopay, always review the statement to ensure there are no issues, and make sure your account has enough money for payments. It’s ideal if you’re able to pay your bills in full, but if you’re unable to, at least make the minimum payment. Building a history of timely payments helps boost and maintain your credit score, it also makes you seem more attractive and responsible to lenders when applying for a loan.

2. Pay Down Debt

Most everyone has debt, and getting rid of it could be another resolution in itself. It can seem impossible to minimize your debt, but the key to lessening your burden is to chip away at it little by little and to avoid taking on new debt. Not all debt is made equal, so consider prioritizing those with high or compounding interest rates. Making extra payments to the principal of high interest loans will reduce the amount you owe, save you money on future interest payments, and boost your credit score. If you’re unable to make an extra principal payment, try making minimum payments so your loans don’t become delinquent. Debt doesn’t just affect credit, it also affects your debt-to-income ratio (DTI) when you’re looking to buy or refinance a home. DTI measures how much money you have left each month after paying your existing bills. Having a DTI of 36% or less is usually favorable to lenders because it means you have enough to make mortgage payments. Additionally, the psychological benefits of minimizing debt are immeasurable.

3. Lower Credit Utilization

Just because you have multiple lines of credit at your disposal doesn’t necessarily mean you should use the maximum amount. 30% of your credit score is determined by your credit utilization ratio, or how much of your available credit is being used. When you’re using a large amount of your credit, it increases the likelihood that you will have problems paying it back, which negatively impacts your score. To calculate your credit utilization ratio, divide the total amount you owe by your total credit limit, and then multiply that number by 100. A credit utilization ratio of no more than 30% is recommended. If your number is greater than that, try cutting back on expenses and how often you put purchases on credit. When it makes sense, opt to pay for things with cash or even a check. Additionally, don’t close any lines of credit. Closing an account will decrease your credit limit, and therefore, your score. For accounts you don’t want to use anymore, simply stop using them and ensure there are no recurring charges on it.

4. Make a Budget

A well-made budget can serve as a foundation for your finances and prevent excessive debt and credit issues. Track your current spending habits and identify where you can cut back or substitute with a cheaper option. Divide up your monthly spending into broad categories, such as living expenses, transportation, and entertainment, then compare it to your monthly income. If you feel overwhelmed trying to sum up your spending, gather one month’s worth of bills to get an idea of where your money goes. There are also many free resources online to help organize your finances, like budget worksheets. Now that you’ve created your budget comes the difficult part—sticking to it. Should you find yourself tempted to break your budget, ask yourself honestly if the expenditure is more of a need or a want. Following a budget can take a lot of willpower, but it’s well worth the effort when doing so can improve your credit and allow for greater financial freedom in the future.

5. Monitor Credit Information

Staying informed of your credit information is a must, regardless of your current score. Not only will it tell you where your credit currently stands, it will also inform you of any inconsistencies. Be sure to review your credit report at least once a year for errors. You are legally entitled to a free report from each of the three credit bureaus (Equifax, Experian, TransUnion) each year, and it’s recommended to request one from each agency since they differ slightly. Don’t worry—requesting your credit report is considered a soft credit pull and will not lower it. If you notice any issues, take steps to resolve them immediately. You should also monitor your credit card statements for mistakes. Just as you get yearly health checkups, the same should be done for your credit.

As with any type of goal or resolution, improving your credit involves new habits, patience, and dedication. Though it will take time and effort to see the results, having a healthy credit score will give you more options and better opportunities in life.


If you have any questions about your credit, contact one of our licensed Mortgage Loan Originators. If you’re ready to begin t­­he home buying process, click here to get started!

NFM Lending is not a credit repair agency, financial advisor, or debt settlement company.