In my monthly newsletter that I send to my clients, my featured article this month is on how to improve your credit score. This is an important issue to me, because I don't feel that there is enough information and education out there when it comes to understanding your credit and what you need to do to keep your score as high as possible. Besides the tips below, I also work with a credit company that provides me with some great tools, such as a Credit Simulator program; I can plug in possible changes to your credit, such as lowering the balance on a specific credit card and it gives me an estimate of how much that would likely increase your credit score. It's not exact, but I've had some great results from it.
Once we've determined what needs to be done to increase your score, they also have a program called Rapid Re-score, which allows us to receive updated credit bureau results in a matter of days, rather than the standard 30-60 days it normally takes. This is a huge help when a borrower needs to close quickly and doesn't have time to wait 30-60 days for an improved score. Your credit score has an enormous impact on your interest rate and program and not enough consumers know what to do to maximize it!!
The interest rate you'll pay for the money you borrow will be determined, in large part, by this three-digit number that's generated from the information in your credit report.
Most lenders have definite carved-in-stone rules about how to qualify a borrower for the best loan terms, and those rules almost always place a major emphasis on your credit score. If their best rates are offered to borrowers with a score of 700 or higher and yours is a 698, those two points could cost you thousands of dollars!
According to http://www.myfico.com/, the consumer Web site of the Fair Isaac Corp. that created the FICO score (the most commonly used credit score), the interest rate difference between those two scores is one-half percentage point.
The good news: You can take steps to improve your credit score.
The number of variables that play into an individual score make it impossible to say that one particular action will increase a given score by a certain number of points. Sometimes, I have great results when a borrower pays down a credit card or pays off a collection; other times, it makes very little difference. But there are at least some good guidelines to try and follow.
Here are some tips I've picked up along the way:
1. The mantra for getting a great score is pay your bills on time, keep account balances low, and take out new credit only when you need it. This is mainly about plain old common sense. People who do these things faithfully usually have very high scores. To lenders, high scores signify that you're being conservative and cautious about credit. In turn, they see you as a lower risk borrower and will reward you with much better terms and a much lower interest rate.
2. What if you're house hunting and you just need a few extra points to bump you over the line to the great rates? Start by having your mortgage broker (aka: me!) pull your credit report and your credit score to see where you are. If your score is above a 720, you're golden. Even 700 is going to get you good terms. Improving your score from, say, a 720 to a 740 won't get you better terms, though, so don't waste your time doing that. Just continue to follow the guidelines above.
What you're really looking for on your report are factors that could be negatively affecting your score. Look for errors in the report, such as accounts that aren't yours, late payments that were actually paid on time, debts you paid off that are shown as outstanding, or old debts that shouldn't be reported any longer (negatives are supposed to be deleted after seven years, with the exception of bankruptcies, which can stay for as long as 10 years). Every time I meet with a client, I go over their report with them to ensure that the information is correct. I can't tell you how many times there has been old or downright incorrect information in the report!
After repairing errors, the fastest route to a better score is paying down balances on credit cards; there's really no magic bullet, but, in my experience, it's possible to increase your score 20 points in 60 days (or less, if you use Rapid Re-score) by paying down your credit lines.
3. Had a few late payments in your past?
If you find yourself in a tough financial situation, you can protect your score by making sure your payments don't go 60 days past due; some lenders don't report 30 days past due, but they all report 60 days past due. Another important tip; if you already own a home, do everything you can not to get a 30 day late on your mortgage. It is crucial to keep your mortgage track record clean and better to have lates on other credit lines before you're late on your home loan. I've always said that I'd sell my kidney before I'd be late on my mortgage!! :-) Trust me and follow this advice, even if you take nothing else away from my tips!
Even if you've paid your bills late in the past, there's still hope for you! You can improve your credit score by paying every bill on time from now on. Remember, today is a new day. It's much like a diet, actually; just because you slip up one day and have that hot fudge sundae, it doesn't mean you should just give up on the whole diet! I promise that I've seen clients scores go from 620 to 710 in a matter of months (or, on one memorable occasion, about 15 days!)
From now on, do your best to pay your bills on time (or ahead of time) and keep your balances as low as possible. My mom always told me not to buy something unless I could pay for it in cash and to only use credit cards if I could pay them off in full each month. I guess that's why she has one of the highest scores I've seen!
4. What not to do!
One thing you shouldn't do if you're just trying to boost your score is close unused accounts. If someone tells you to close unused accounts to improve your score, don't listen. It won't help you and it can hurt you.
Closing unused accounts without paying down your debt changes your utilization ratio, which is the amount of your total debt divided by your total available credit. You appear closer to maxing out your accounts. That's why your score can drop. It doesn't mean people shouldn't close them, but don't close them to improve your score.
If you do cut up cards, though, leave the oldest one open! The length of your credit history is another factor in your score. If you close the account of the credit card you got when you were a freshman in college and leave open the ones you just got within the last couple years, it makes you look like a much newer borrower.
5. One last tip!
Another strategy for bringing up your score: Transfer balances from a card that's close to being maxed out to other cards to even out your usage/balances. Or just spread out your charges between a few cards. Try to get the balance to credit limit ratio on all of them at 20 to 30 percent instead of a bunch at zero and one at 80 percent. You're not spending less, you're just shifting it around to different cards.
Transferring the balance to a card with a lower utilization could possibly help, but remember, it's much better to actually pay down the debt if you can.
The bottom line: know that you're not powerless when it comes to your credit score. There are a lot of things you can do to improve your score and you need to understand what your credit is like now and what's influencing your score today. Then you can go out and get that amazing interest rate!
Have a great day!
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Julia - 15 + years in the biz and I am not totally sure all the valid points above work. Explain the borrower with 640 scores currently in a BK or the person with perfect credit with 590 scores..... I understand everything you put above and agree but sometimes scores still don't make sense..... LP