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‘Ways to Improve Your Credit’ Series

March 5, 2012

Part 3

Oftentimes, what holds a borrower back from scoring higher on the FICO scale is the ratio between their credit balance and their credit limit. Simply speaking, most people are over-extended when it comes to credit, and this weighs heavily against a borrower. The way the credit bureaus view it is like this, if a borrower has a credit card with a $500 limit, they should only be utilizing around 30 % of their total available credit. That breaks down to having a balance owing of around $150. What the credit bureaus usually see when credit is pulled is a card with a $500 limit and a balance of $499 and some change….not even enough left to buy a pack of gum! This sends a message to would-be creditors that, given the opportunity, another offer of open credit will result in another maxed-out credit card. What does this translate to for the borrower? A lower FICO score resulting in higher chances of a denial from a prospective creditor.

There are ways to combat this phenomena, of course, but as with everything else, it does come with a price. Enter the sub-prime merchandise card arena. Now, the obvious question is: What the heck is a sub-prime merchandise credit card? The answer is probably very close to what you are most likely thinking it is: a credit card with a high annual fee and/or interest rate. This is a mostly true statement, however, this card does serve a purpose and that is to help tilt the debt ratios in your favor. Of course, it is important to know that this does not come without its share of caveats which are discussed here.

A sub-prime merchandise card is a credit card that one can attain by agreeing to pay an upfront “annual fee” or “servicing fee.” These fees can run anywhere from a nominal monthly service fee to an upfront “set-up fee” of a few hundred dollars. What can one buy with one of these cards? To be honest, the options are limited; these cards usually come with a designated online store at which to spend your available credit line. These “stores” might only sell housewares or books, and the prices are at a substantially higher mark-up than if these same items were bought at another store. Now, while all of this probably sounds suspect, and essentially it is, the up side is that the person applying for credit can expect to see a credit line worth anywhere from $500 to $10,000! The best part is that it is immediately given and reported to the bureaus. So if a borrower has credit cards totaling $3000 which are all maxed out, and they apply for a $7,000 sub-prime merchandise card, they now have $10,000 in total credit and they are only utilizing 30% of their total available credit. This sends their FICO score higher up on the credit totem pole. These cards are not for everyone, obviously, because most people might not be able to see past the initial fees, but for those without tunnel vision, this presents a credit opportunity of epic proportions. I must mention here (read “disclaimer”), your best bet is to have someone who is experienced with these types of cards help you determine which one, if any, is best for you. Remember, as with everything else, you don’t always get what you pay for, especially if you don’t know what to look for and what to avoid.

If you are planning to buy a home, or know someone who is, and are not sure if this is a viable option for you, just follow these simple steps to find out:

• Have your MLO (mortgage loan originator) review your credit with you. • Check to make sure the items on your report are correct, and if not, contact the bureaus to get

the corrections made.• Determine whether an increase in open credit will help your score or not (this is something your MLO should be able to determine for you).

• If you do decide that a sub-prime merchandise card is for you, make sure to verify to which bureaus they report.

If you have additional questions, I might be able to help you. Feel free to contact me at the number listed below. And remember, even if you already have your own go-to loan person, you still might learn something new of value that can help you or your clients. There’s no way to know if you’re getting the best service available unless you step outside your comfort zone and try something new.

Wishing you a productive week!

Melba Baquero
DRE Broker 01354095, NMLS 255430
Southwest Riverside County/San Diego County


First, complete a loan application on our website
-Go to
-Click on Apply Now at the top
-Scroll to the middle of the page and Click on 3. Full Application
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