Wed 11 Jan 2006
Does Amortization Loans Affect FICO Scores?
Posted by lizweston under Credit & Debt, Q&A with Liz
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Dear Liz: Are credit scores negatively affected by so-called negative amortization loans? I’m talking about the mortgages that allow you to pay less than the minimum interest due on your loan. Any unpaid interest is added to your principal so that your mortgage grows rather than shrinks. Would this rising balance hurt your scores?
Answer: The short answer is no. Negative amortization by itself won’t damage your credit scores, even if your balance goes above the original balance shown on your credit reports.
If the increase in the amount owed “is permitted by the way the loan was structured and the borrower is meeting all her loan payment obligations, then the FICO score won’t be affected by the higher balance,” said Craig Watts, spokesman for Fair Isaac Corp., which created the FICO score, the leading consumer credit gauge.
If, however, your balance is rising because you’ve missed payments and you’re accumulating overdue interest and penalties, then your FICO score almost certainly will drop, Watts said.
Clearly, the FICO scoring system treats installment loans like mortgages quite differently from revolving accounts such as credit cards. If your credit card balance rises higher than your credit limit (or even comes close), your FICO scores will indeed suffer.
