6 Quick Fixes for Your Credit Score
Posted under: Credit Score
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August 23, 2010 10:59 AM |
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72 comments
Q: What do you advise a financially fit homebuyer to do to increase their credit score or make themselves more attractive buyers, to qualify for the lowest mortgage rates?
A: A FICO score of 700 (FHA)/740 (Conventional) or better qualifies you for the lowest rates. In fact, it qualifies you just as well as a higher score, so if you’re at or over 700/740, there’s no loan qualification rationale for investing effort into boosting it. But these are firm breaking points. The difference between a score of 698 and a score of 700 (in an FHA loan scenario) can cost you a quarter of a point in interest, or thousands of dollars over the life of your mortgage.
I’ve found that people asking about how to boost their credit to qualify for the best interest rates is similar to people asking me how to lose weight: I tell them the truth, then their eyes glaze over when I give them the straight dope, no magic bullets. No one wants to hear: eat vegetables, cut the sugar, and exercise; similarly, they don’t want to hear pay your bills on time, every time.
But I’ve been asked this question a lot recently, so here goes, anyway!
1. Pull your reports online – get them for free, no strings attached, at the government authorized website AnnualCreditReport.com. This doesn’t get you your actual FICO scores, but it does get you the content of your report. Look for errors that could be depressing your score, like accounts that don’t belong to you, balances that are actually lower than reported, old debts that are paid off that should have been removed entirely (7 years for credit cards, 10 for bankruptcies).
2. Consider reopening accounts you thought were open but have been closed because you haven’t used them in so long - it will help boost your utilization ratio, one element of your credit score that is dependent on how much available credit you have.
3. Pay down some debt. This both decreases your debt-to-income ratio (36% is the goal, including the proposed mortgage payment) and increases your credit score, if you do it right (see the next tip).
4. Don’t close any accounts. Instead, spread your debt out. The ideal utilization ratio is about 20-30% of your available credit overall, and on any given account. Closing accounts reduces the amount of credit that is available to you, so it makes it look like you’re closer to being maxed out.
So if you have one card that’s near its max and several others that have zero balances and you’re trying boost your score a bit, quickly, consider balance transfers to spread our your debt more evenly, aiming for 20-30% of the available credit on each card.
5. Use your credit regularly – and pay it on time, every time: Having a good FICO score doesn't happen because you have sound personal finances, including no debt. FICO scores are a measure that shows that you have a history of responsibly using and managing and repaying your debt on an ongoing basis.
6. Finally, check in with your mortgage broker. Have them pull your report and score, as the report they pull is the one they’ll have to go by in the final analysis. If you’re really close to a score level higher, that would empower you to qualify for a lower rate, they can actually run a credit diagnostic on your score and generate some recommendations for which actions you could take to raise your score by the needed few points. Then many of them can do what’s called a ‘Rapid Rescore’ – once you’ve paid that bill off, they can actually submit a request directly to the credit bureaus to update that information and your score in just a few days.
None of these tips will get someone with a 500 credit score to a 700 (other than a massive debt reduction program). But if you’re trying to get a little boost to get you over a credit score hump, these can be potent, and save you beaucoup bucks in interest.
Psst - you should follow Trulia and Tara on Facebook, too!
A: A FICO score of 700 (FHA)/740 (Conventional) or better qualifies you for the lowest rates. In fact, it qualifies you just as well as a higher score, so if you’re at or over 700/740, there’s no loan qualification rationale for investing effort into boosting it. But these are firm breaking points. The difference between a score of 698 and a score of 700 (in an FHA loan scenario) can cost you a quarter of a point in interest, or thousands of dollars over the life of your mortgage.
I’ve found that people asking about how to boost their credit to qualify for the best interest rates is similar to people asking me how to lose weight: I tell them the truth, then their eyes glaze over when I give them the straight dope, no magic bullets. No one wants to hear: eat vegetables, cut the sugar, and exercise; similarly, they don’t want to hear pay your bills on time, every time.
But I’ve been asked this question a lot recently, so here goes, anyway!
1. Pull your reports online – get them for free, no strings attached, at the government authorized website AnnualCreditReport.com. This doesn’t get you your actual FICO scores, but it does get you the content of your report. Look for errors that could be depressing your score, like accounts that don’t belong to you, balances that are actually lower than reported, old debts that are paid off that should have been removed entirely (7 years for credit cards, 10 for bankruptcies).
2. Consider reopening accounts you thought were open but have been closed because you haven’t used them in so long - it will help boost your utilization ratio, one element of your credit score that is dependent on how much available credit you have.
3. Pay down some debt. This both decreases your debt-to-income ratio (36% is the goal, including the proposed mortgage payment) and increases your credit score, if you do it right (see the next tip).
4. Don’t close any accounts. Instead, spread your debt out. The ideal utilization ratio is about 20-30% of your available credit overall, and on any given account. Closing accounts reduces the amount of credit that is available to you, so it makes it look like you’re closer to being maxed out.
So if you have one card that’s near its max and several others that have zero balances and you’re trying boost your score a bit, quickly, consider balance transfers to spread our your debt more evenly, aiming for 20-30% of the available credit on each card.
5. Use your credit regularly – and pay it on time, every time: Having a good FICO score doesn't happen because you have sound personal finances, including no debt. FICO scores are a measure that shows that you have a history of responsibly using and managing and repaying your debt on an ongoing basis.
6. Finally, check in with your mortgage broker. Have them pull your report and score, as the report they pull is the one they’ll have to go by in the final analysis. If you’re really close to a score level higher, that would empower you to qualify for a lower rate, they can actually run a credit diagnostic on your score and generate some recommendations for which actions you could take to raise your score by the needed few points. Then many of them can do what’s called a ‘Rapid Rescore’ – once you’ve paid that bill off, they can actually submit a request directly to the credit bureaus to update that information and your score in just a few days.
None of these tips will get someone with a 500 credit score to a 700 (other than a massive debt reduction program). But if you’re trying to get a little boost to get you over a credit score hump, these can be potent, and save you beaucoup bucks in interest.
Psst - you should follow Trulia and Tara on Facebook, too!
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Comments
thanks for the great tips everyone can use!
@Alicia - their issue might not be credit score, per se, so much as the fact that many lenders and loan guidelines just impose a hard 2 year + no-finance period after a short sale, no matter what their credit score is! That time gives them a great opportunity to rent and pay down the rest of their consumer debt. On time, every time.
I am sure the author meant "best" or "lowest" rates instead of "highest" rates
Thanks for the information very helpful will pass this along to others.
Donna Chorey, Associate Broker in Las Cruces,NM 575-640-1332
Also thought one should limit number of cards to 4 or 5, with it being very important to keep the oldest cards to show history.
My personal gripe is that I'm not rewarded in my score for paying my cards off every month!
Thanks Tara. I love your posts.
Susana Field, The Steamboat Gal
Steamboat Springs CO
The only thing I question is the statement about credit scores above 700, there are three tiers on conventional loans in my area above 700. My shop is by far the largest originator in the local metro area. We also broker a few loans to a large Midwest investor and I checked their rates for a much larger region and found the same thing on their sheet. Both of us have seven tiers on conventional loans, 700 to 719 is actually tier 3 and that band also contains 5 loan-to-value factors. It is possible the hits are lower in your area but I am under the impression they are universal and dictated by Fannie or Freddie. I think they set the minimum hits but lenders may be allowed to increase them if necessary, would appreciate any insight if other lenders do not agree.
The difference on my rate sheet from 700 to 740 could be as much as one point, which is cost not interest rate. On a loan of $400,000 that would equal a $4,000 increase in closing cost to keep the rate the same. I believe this is a very good incentive for increasing a 700 credit score if you live in my part of the country.
The other way of looking at it as used in your answer is an increase in rate of 3/8% based on my rate sheet from yesterday. On the same loan amount that equals a difference in payment over the life of the loan of $32,000+ which is another good reason.
https://www.annualcreditreport.com/cra/index.jsp
You get one free look/print/save a year but you will have to pay a few $$ to look at the actual score, but you can dispute anything that is not correct. They send you an email when the dispute is settled. You get to look at all 3 credit bureaus.
At the time I wrote this, I did check with my mortgage sources. 740 was the ideal score for conventional, 700 for FHA - but - at the time, FHA and Conventional rates were actually running neck and neck. Obviously, FHA is more universally accessible due to the down payment issue, which is the number one issue otherwise qualified buyers are struggling with right now.
So, I'd have to agree with @JimSimms that with the most recent change to the FICO algorithm, there are some times/situations when 740 CAN be incrementally more desirable in terms of rates.
One good reason EVERYONE should be checking out their reports and scores - even if you've already been told you have a "great" score!
Thanks,
Mildred Valentin
Great Blog!
@allstarmom3
I owe $36,000 in credit cards..and i'm happy that they ain't getting a dime..If everyone did the same we would not have a credit score ?? think about it !! the entire system runs on how the banks feel they should treat you.
Well guess what, I beat the system.. Never paid one bill, and never will, after 3 years it's all wrote off any way..you are better riding it out...
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Now, for nine years, one cc,paid, no other credit, renting the same house for 9 years with on time payments and get turned down through underwriters!!! You can't win for losing!!!! We thought we were doing very well. Paying cash for our cars, furniture, etc. And we get punished for it? America is not what it was! Shame on you!