As you prepare to apply for credit (like a home mortgage) understand that it is significantly better to have your best possible credit profile BEFORE applying. Working to improve your score during the mortgage process can be done, but there are two problems. One, time to clear up items can become an obstacle when compared the time you are anticipating a closing. And two, lower scores upfront can give an underwriter an additional reason to be uncomfortable with a file. “Sooner, rather than later” should be the mantra of credit score improvements. Here are some tested ways to do it:Credit Cards – Revolving Debt proportions
1. Look on the credit report for revolving debt (not installment loans, or “open” accounts)
2. As a general rule of thumb, the balance should be no more than 30% of the credit limit. So, if it’s more than that, have you should make every attempt to pay it down.
3. If there are many revolving accounts with high balances, you will most probably need to pay down most or all of them for the best score.
4. If there is nothing derogatory on the credit report, just high balances on revolving debt, you can often improve the score significantly. But, if there are many derogatory items on the credit report, paying down revolving debt may not help the score very much.
5. Many lender have software programs that can quickly determining for you which (if any) revolving accounts need to be paid down, and to what balance.
Collections/Judgments:
1. Paying off or satisfying such a derogatory account does not normally improve the score because the derogatory account still exists, and so still hurts the score. In fact, paying off an old collection may even make the score drop.
2. However, for collections, the borrower can ask for the account to be completely removed or deleted. If you have not yet paid the collection, you can use that as a bargaining chip.
3. If there are many collection accounts, removing just 1 or 2 may not do much good. You always need to look at the overall credit picture.
4. Charge-off accounts behave a little differently than collections. You can sometimes gain points by paying those off.
5. Your lender likely has a What-if Simulator to experimentally see what affect removing an account has on the score.
Late Dates
1. When you look at the overall credit report and you see LOTS of late dates, especially ones from within the last year, there is not much you can do to help the score…those lates simply need to drift into the past.
2. However, if you just see 1 recent late date on 1 account, and just 1 other recent late date on another account, you should call those creditors and ask…beg…for those single late dates to be removed as a courtesy. It may also be that the late dates were a mistake, but don’t push the creditor to admit to making an error. Just ask them to remove it as a courtesy since you have an otherwise perfect payment history with that creditor.
3. Your lender can use the What-if-Simulator to experimentally see what affect removing a late date has on the score.
Authorized User Accounts-removing or adding
1. Piggybacking on someone else’s account can help or hurt your score.
2. If that account has recent late dates, you can most probably improve the score by having the actual account holder remove you as a user.
3. If the account is a revolving credit card and it’s “maxed out,” you might also improve the score by removing it, but only if you will still have other revolving credit cards on your report.
4. What about adding someone as an authorized user to a credit card? This may help, but the better course of action is to get the actual card holder to make it a joint account with you. This guarantees that the account will show up on the credit report within a month or two. But be careful…the account should have a lot of history, no late dates, high credit limit, and low balance.
Other things to help
1. Keep old revolving credit cards open…don’t close them.
2. Regularly check your credit report to catch errors early. You get a free one each year from each bureau. Go to www.annualcreditreport.com. Don’t do all 3 bureaus at the same time…space it out throughout the year.
3. Learn more about credit from websites like www.myfico.com and to get addresses to write the bureaus.
While I trust that some of your questions were answered in this blog, I bet many questions were also raised about your individual circumstance. Credit Score Optimization is one of the central reasons why you should engage the expertise of a good loan officer right NOW.
