In part 1 of this series on credit we talked about how important credit has become in surviving the current home depreciation environment and avoiding the ARM Reset Foreclosure Trap. In part 2 of the credit series we looked at the elements that comprise your credit score. Hopefully now you have a good understanding of why your credit score is so important and how it is calculated. Here is a recap of the series so far and where we are at to date:
Credit Series Overview
- Why credit is so important
- Understanding elements of credit
- Improving your score organically
- Improving your score using 3rd party help
- Managing your score
As I said in my last post you are going to use the understanding of the elements of your credit score to help you improve your score organically. When I say organically I mean “by yourself.” In this post we are going to talk about some of the most powerful ways to improve your credit score on your own. So let’s get started.
Setting a Baseline
Before you can work on improving your score you need a baseline; you need to know where you are at so that you can set some realistic targets for improvement. “If you don’t know where you need to go, any road will get you there” - someone famous. This is true with your credit score as well. You won’t know which of the following tactics to use or not use unless you understand your credit file and the items in it. In order to establish your credit score baseline you need a copy of your credit report.
Getting a Copy of Your Credit Report
There are thousands of services that offer “free” credit reports just for joining their service. As in mortgages - anything that is too good to be true probably is. These sites really don’t offer free reports, and in fact many of them have been subject to lawsuits over their deceptive advertising tactics. The government passed legislation that mandates that each of the three main credit bureaus Equifax, TransUnion and Experian, provide you with free copies of your report once a year. That sounds like the route to go; unfortunately the bureaus are not compelled to (and don’t) provide you with your credit score - only the raw data of the report. While this can be helpful it doesn’t allow us to set the baseline we need.
To get your scores I recommend using MyFICO.com. MyFICO.com is run by the Fair Issac Company which developed the basis for the scoring model FICO. FICO is the score that is given to you based on the information in your credit profile (as discussed in the Elements of Credit article). MyFICO.com offers many services that allow you to view your credit as often as you like with out any penalties. They have very reasonable subscription programs. I highly recommend getting a subscription to their service. For around $3/month you can have access to the information that can save or cost you hundreds each month in mortgage and other loan payments.
I must disclose at this point that (1) I use MyFICO.com and have had exceptional results (which I’ll discuss in more detail below) and (2) that I receive affiliate commission if you choose to sign up for MyFICO.com through this site. This should not taint my advice. If you’ve been reading Blown Mortgage for some time now you’ll no doubt remember in very old posts (before I was a MyFICO affiliate) that I recommended MyFICO to Blown Mortgage readers. In fact I’ve only been an affiliate for about a month but have been recommending them for over 3 years now to clients and friends.
Once you subscribe to MyFICO.com you’ll have access to your reports and scores. Now this is where the fun begins. We are going to look at the best ways that you can improve your scores with out the assistance of credit repair or other type credit services.
Understanding Your Score
First, look at your credit score. What is it? In today’s lending market (which is getting tougher every day) here are the ranges of credit in the order of best to most marginal and the lending category you typically qualify under:
850-720 - Prime (excellent credit)
719 - 620 - Alt-A (good credit)
620 - 540 - Subprime (fair credit)
500 & below - Hard Money (poor credit)
Depending on where you are on this credit ladder will dictate the goals you set for yourself and your score improvement. Let’s set a goal to move you up one credit grade. This is not an easy task but ultimately what we are trying to do is get you to a point where you can avoid the ARM Reset Foreclosure Trap and that will require excellent credit. “Every journey begins with a single step.” - another famous person.
The Information in Your Report
One of the first things to do is to go through your report line-by-line and review all of the accounts listed. Consider this: In June 2004, The U.S. Public Interest Research Group published the results of a survey it conducted involving 200 adults in 30 states to test the validity of credit reporting. Their findings were as follows:
- Twenty-five percent (25%) of the credit reports contained errors serious enough to result in the denial of credit;
- Seventy-nine percent (79%) of the credit reports contained mistakes of some kind;
- Fifty-four percent (54%) of the credit reports contained personal demographic information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect;
- Thirty percent (30%) of the credit reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open.
Those numbers should be startling to you; and they should remove any doubt in your mind as to why you would want to review your credit. Credit plays a large factor in your quality of life by determining how much you pay for money. Why would you let erroneous information cost you money? You shouldn’t.
Correcting Errors
As you comb through your report look for errors and incorrect or outdated information. Verify all sections including :
- Accounts - are they updated correctly and marked as either closed, paid off or open?
- Public records - are there judgments, liens, bankruptcies or other actions that shouldn’t be on there?
- AKA’s - is someone else’s name on your credit report (especially common if you have a common last name)
- Inquiries - are their inquiries from companies you don’t recognize (could be an early indicator of credit fraud)
- Employment - is there an employer listed that you are unfamiliar with? (could be an indicator of mixed up information in the rest of your report)
If you find errors in your reports here are some simple steps to help fix them. Fixing erroneous information is the number 1 fastest way to improving your credit score.
- Make a copy of the report and circle the items you are questioning. Keep your original copy for your own records.
- Prepare a letter to the bureau that provided you with the report in question, and request to have the erroneous item(s) removed. If you have proof of payment for an item in question, include a copy of that documentation.
- Prepare a letter to the creditor reporting the problem, especially if you feel you are a victim of fraud or identity theft. Inform the creditor that you are disputing an error reported to the bureau, state why the claim is inaccurate, and include any relevant documentation to prove your point.
You can find the addresses for each of the bureaus at the end of your credit report. You can also dispute much of the information online as well; but for record keeping it may make more sense to do it via regular mail. You should keep a file for any items that you dispute.
If you’d like some sample letters requesting updates, changes and fixes to your credit report please email me at morganb@blownmortgage.com. I will be happy to send these templates to you.
When my wife and I first signed up for MyFICO.com and pulled copies of our reports we couldn’t believe the errors that were on our report. It was truly amazing. Over the next 6 months (and yes it can take that long, and longer) we systematically cleared each piece of erroneous information. There were credit cards that weren’t ours, information from people with similar names (my last name Brown is extremely common) and more. By correcting those errors our scores each went up approximately 50 points. It was amazing. While you may not have the same success you will more than likely get a bump in your score if there is incorrect information on your report that is impacting you in a negative way.
Account Balances
Another easy way to add points to your score is to keep your account balances low. We talked in a previous post about the utilization rate of your credit. The lower that is (except when it’s zero) the better your score will be. However, the magical numbers seem to be 50% and 33%. If your account balances are below 50% of the total line of credit your score will improve than if they are over that mark. Further if you are able to reduce them down below 33% of the available credit you may receive another bump to your score.
The simple solution here is to pay down balances so that you get accounts below the magical 50% utilization line. Going from 52% to 49% can earn you a good chunk of points on your score. Even shifting debt around to a different card to reduce one high-balance card can earn you points even if you aren’t improving your overall debt picture.
Leveraging Seasoned Accounts
One of the biggest mistakes that people make that cost them points is closing charge cards and other accounts that they have had for a long time that are in good standing. The urge to pay it off and cut up the card is strong; but its a head-fake. The longevity of your accounts factors in to your score. The more seasoned your accounts are the more weight they receive. If they are in good standing the more they act positively towards your score. Closing a long-held account is a bad idea and can cost you points.
The solution: keep accounts in good standing open - don’t close them out!
Time
Time heals all wounds is just as true in relationships as it is in credit. Each month that goes by where you make payments on time and meet credit obligations means a few more points to your score. These are important. There are magical breaks (listed above) on the credit ladder that those few points can mean the difference in qualifying for a loan or not. Run together enough positive months and you will amass points while improving your score. Some estimates suggest that by making your mortgage payment and other debt payments on time for a period of 2 years you can increase your score 40 - 70 points. In the scheme of things 24 months is not that much time.
Authorized Co-Signer Accounts
These accounts have recently come under fire and Fair Issac (FICO) has started eliminating these from their score calculations. The premise is that you are added to an account of a spouse or family member who has excellent credit (like a credit card). That account shows up on your report and improves your credit score based on the good payment history on the account. This has been a common practice between parents and children for years; however, just recently changes have been made to discount those accounts.
Solution: Don’t count on authorized signer accounts to improve your credit!
Utilizing Credit
Another common mistake made is that people with previous credit problems shy away from using credit for fear of abusing it again or losing control of the charges and payments. Unfortunately by not using credit you are not working on improving your score. If you have damaged credit you should attempt to qualify for a low-limit card (say $350) or apply for a secured credit card. A secured credit card is one where you credit availability is backed by the amount of money posted to an account that secures that credit. You can usually open one of these with as little as $500. By utilizing your credit and showing your ability to use credit in a responsible manner you’ll increase your score. If you don’t use your credit there will be no track record of good payment history to improve on your credit scores.
Solution: Use credit wisely and actively. Make small purchases such as gasoline and groceries and repay a substantial part of the bill off each month.
Final Thoughts
Improving your credit score organically really comes down to managing your credit wisely over time. That is why it is so important to get started today. If you are in an adjustable rate mortgage that will recast in 9 months start today. Same advice applies if you have 5 months or 3 years left before you will need to consider refinancing. The more time you give yourself the better results you’ll be able to achieve through responsible credit management.
Erroneous information can be costing you thousands of dollars. Sign up for MyFICO.com and review your information. Dispute inaccurate items and watch your credit improve as faulty data gets cleaned up. Remember you have to drive that process. The bureaus are slow to react and slow to make updates. Get started now on cleaning up any wrong data.
Utilizing the above advice can gain you anywhere from 30 to 100 points or more in credit score improvements. I hope that you are able to clean up your credit and improve your history and profile to climb the credit ladder up to the excellent rung; it gives you the best chance of avoiding the ARM Reset Foreclosure Trap.
For a copy of my free white paper on your credit score please email me at morganb@blownmortgage.com. I’m happy to send it along. If you’d like the template letters to send to the credit bureaus you can email me there as well.
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