How do you boost your credit score? Let’s start with, “what is a FICO Score?”
A FICO Score is a number that credit-granting companies use to assess an applicant’s risk. Credit scores range between 200 and 850. The higher the score, the lower the risk. Above 620 is considered desirable for obtaining a mortgage.
There are five factors that comprise the credit score. These are listed below in order of importance, just as a loan underwriter will look at the score:
ON-TIME Payment History: 35% impact
Paying debt on time and in full has a positive impact. Late payments, judgments and charge-offs have a negative impact. Missing a high payment has a more severe impact than missing a low payment. Delinquencies that have occurred in the last two years carry more weight than older items.
Just plain pay your bills on time. Seriously. Your payment history – including the ones you pay late or skip altogether – makes up a whopping 35% of your FICO score. If you’re absent-minded or merely overwhelmed, then automate your payments or see if your online banking portal can send you an email or text reminder.
Going from paying one or more bills late each month to paying all on time could show score improvement in one to two months.
Credit Utilization Ratio (aka available credit): 30% impact
This ratio is the difference between the outstanding balance and the available credit on credit cards. Ideally, you should keep your balances below 10%- 30% of available credit limits per card.
For example, suppose your VISA has a $1,500 limit and you routinely charge a grand a month. It doesn’t matter if you pay it all off before it’s due. What matters is the credit bureaus think “Gina is using two-thirds of her credit! What a spendthrift!”
If you’re just cash averse, try to pay your bills twice a month. Using too much of your credit limit at any given moment doesn’t look good. Suppose your limit is $3,000 and a month’s worth of havoc (car repair, doctor bills, plane ticket to a wedding) means you’ve charged up $2,900. Sure, you plan to pay in full by the 18th of the month – but until then it looks like you’re maxing out the card. Instead, make one payment just before the statement closing date and second one right before the due date. The first will likely reduce the balance that the credit bureaus see and the second makes sure you won’t pay interest or a late fee. Or…
Raise your credit limit. Ask your creditors to increase your limit. Request double the previous limit. Be careful with this one, though: It works only if you can trust yourself not to increase your spending habits accordingly.
However, the easiest way to boost your utilization is to use a credit card and pay your balance down to 1% of your credit limit every month. You want to have positive utilization so it’s clear you are using the card, but otherwise want your ratio to be as low as possible. Estimated time for improvement: One month
And, BTW, transferring credit card debt from one card to another could actually lower your score.
Length of Credit History: 15% impact
This marks the length of time since a particular credit line was established. In general, the longer an account has been open, the better. It gives a longer picture of your habits.
Don’t close any cards. Canceling a credit card will cause your available credit to drop, which doesn’t look good to a bureau. One way to keep a card active is to use it for a recurring charge such as a utility bill.
Credit Mix: 10% impact
Think diversity. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards only, because it indicates whether a person can handle different kinds of accounts.
Mix it up. Using different kinds of credit can make for a modest boost to your score. For example, you might take out a small personal loan from the credit union or buy a piece of furniture or appliance on installment, rather than charging it on a VISA or MC.
It will also increase your total outstanding credit line, and thus your utilization ratio should improve too. But, don’t go nuts—try opening just one new account, at least at first. If you apply for a card every time you’re asked whether you want 10% off your purchase today, you’ll take a hit on the number of recent inquiries . And that won’t look good.
Estimated time for improvement: One to six weeks, based on processing and reporting your new account to the credit bureaus.
Inquiries: 10% impact
This quantifies the number of inquiries that have been made on a consumer’s credit history within a six-month period. Having too many credit applications can lower your score. Each hard inquiry can cost from 2 to 50 points on a credit score, but the maximum number of inquiries that will reduce the score is 10. In other words, 11 or more inquiries in a six-month period will have no further impact on the borrower’s credit score. However, multiple inquiries about your credit score from the same type of lender are counted as ONE, if submitted over a short period of time– like shopping for a car or a mortgage over a 30-day period.
3 Tricks to boost your credit score fast
The first thing to do is get a copy of your credit report from AnnualCreditReport.com. The three major credit reporting bureaus must give you one free copy per year. Get yours, then begin by:
1. Dispute errors
Mistakes happen. You can dispute errors online through Equifax, Experian and TransUnion. After you’ve fixed any foul-ups, you might try to…
You can’t deny that you stopped paying a credit card bill when you were unemployed last year. But you can ask creditors to “erase” that debt or any account that went to collection. Write a letter offering to pay the remaining balance if the creditor will then report the account as “paid as agreed” or maybe even remove it altogether. (Note: Get the creditor to agree in writing before you make the payment.)
You might also be able to ask for a “good-will adjustment.” Suppose you were a pretty good Visa customer until that period of unemployment, when you made a late payment or two – which now show up on your credit report. Write a letter to Visa emphasizing your previous good history and ask that the oopsies be removed from the credit report. It could happen.
3. Become an authorized user
Have a responsible partner or family member? Becoming an authorized user on one of their accounts will let you piggyback onto their good credit history. The full history of the other account shows up on your credit report immediately. And when this older, established credit account is added to your credit history, it results in an increase in the average age of accounts you’ve ‘managed’ — which also increases your credit score. Just be careful to make sure the person you choose actually pays his bills on time and keeps the debts low—just like good credit history, bad history will show up, too. Estimated time for improvement: Immediately
Wait 12 months after credit difficulties to apply for a mortgage. You’re penalized less severely for problems after a year goes by.
It is also better to pay down debt, rather than to use that same flux money to save up for a down payment. Using surplus monies to reduce debt actually boosts your buying power when it comes time for qualifying for a mortgage. In other words, you can afford a more expensive house. This is due to a mortgage-lending metric called debt-to-income ratio. Plus, as discussed here, there are many down payment assistance programs available.
When a credit report is generated, it is simply today’s snapshot of the borrower’s credit profile. This can fluctuate dramatically within the course of a week, depending on the individual’s own activities. The home mortgage borrower should be made aware of this when they enter into the loan process, and know that it’s not in their best interest to go out on a shopping spree. You need to make sure you’re not creating a negative impact on the score while the lender is reviewing your file.
So don’t order items for your new home on credit. Even if you have been “pre-approved” for your home loan, wait until after your home loan has CLOSED to charge appliances, furniture, etc., as that will add to your debt during loan underwriting.
Roll through to the rest of my series: “Why Should I Buy a Home vs. Rent?”; “How Can I Afford to Buy a Home?!”; “Show Me the Money to Buy a Home!”; “The Benefits of Buying New-construction Homes vs. Pre-owned”; and “What is Debt-to-Income Ratio?”
If you have a credit score of 560 or better, I can help you!
“So, who can help me with all of this?”, you may be asking. Someone who specializes in homeownership subsidies and mortgage assistance programs– certified in course training.
Not all Realtors are created equal, a la car mechanics or hair stylists. Many don’t have all the tools in their toolbox. They operate with the only the basic skills of their craft. Many cut corners. Like Realtors® who choose to easily line their pockets by dealing with only flush clientele and high-priced homes.
Think of me as, Gina, your New Home Guru. More Savings. More Living. I am more motivated and able to do a great job to help you affordably own your next home. If you want to own a home in the Austin area, reach out.
Pull the trigger, you’ll be glad you did. I will show you the money!