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Since the wide spread implementation of credit scores in mortgage lending in 1996, loan decisions can be made quickly and personal bias is eliminated. Credit scores are now used as a pre-screening tool. Under many loan programs, a loan application won`t even be looked at unless a certain minimum number is met. These scores also hugely impact the cost of credit to the consumer. The difference between the interest rates offered to a person with a score of 550 and one with 720 score averages 3%. That`s about a $360 difference in the monthly payment on a $150K loan, or $130K more in interest over the life of the loan. Loans with lower credit scores also require larger down payments. So hw can you improve your credit score and get the best loan? The actions you can take fall into two separate categories – maintenance section covers actions you should take continually to assure you the highest credit rating possible. The repair section has tips you can use to boost your score immediately.

Credit Maintenance Actions

  1. Keep all credit inquiries for mortgage and car loans to within a 2 week period. All of the scoring models will treat these as one inquiry.
  2. A large number of credit inquiries can pull your score down, so carry a copy of your credit report with you when you shop for credit to avoid unnecessary pulls.
  3. If you have a “thin”credit file, don`t keep more than 2 revolving (credit card) accounts. If you have much established credit, don`t carry more than 4 revolving accounts.
  4. Dormant accounts don’t boost your score, so make sure you use your accounts at least one year.
  5. Find out what day of the month each credit card company reports your balance to the credit bureaus. Make sure you regularly pay down your balances prior to the day, even if this means making the payment prior to the due date. Showing a lower average balance is good.
  6. Avoid transfering balances on credit cards just to get a lower rate. This usually creats an new inquiry and a potential for double reporting of your outstanding balances.
  7. Make sure your credit card company is reporting your actual credit limit and not just the maximum balance you have reached as your limit.
  8. Keep your balances below 45% of your limit and avoid revolving accounts when possible.
  9. Don’t apply for store credit cards, even if they offer you a purchase discount. This type of account tends to drag down a credit score.
  10. Avoid using a finance company to fund a loan. These are thought of as lenders of last resort and having this type of loan can dramatically reduce your score. Some merchants use finance companies for in-store credit so make sure you know how is doing the loan for you before you sign the contract.
  11. If your are bound and determined to close an account, close out your newest accounts first so that you don`t lose your longer credit history.
  12. Verify that all closed accounts are reported as “closed by consumer” for the best rating.
  13. Remember that divorce doesn`t change your obligations with your creditors.
  14. And of course – pay our bills on time! Even if you just pay the minimum required and you are only a few days late. It is not until accounts go at least 30 days past due before they get reported on your report.

Credit Score Repair Actions

  1. Ask creditors to raise your credit limits on your revolving accounts. This is the simplest and easiest move to help your debt-to-limit rations.
  2. Find out what day of the month each credit card company reports your balance and pay it off or pay it down as much as you can prior to that day. This will reduce your balance-to-limit ratio too.
  3. Have a friend or family member add you as an ´authorized user on an account that they have had for a long time. Make sure that account has a low balance-to-limit ratio o you could hurt their score.
  4. Get a copy of your credit report from all three bureaus and fix all errors. The tri-merge report that lenders use omits duplicate information, so you may miss clearing up a negative entry that appears on more than one bureau.
  5. Dispute inquiries if you didn´t ask that creditor to pull your credit.
  6. Pay off and close out newer, revolving accounts that aren´t being used.
  7. Close all department store and gas company credit cards. These type of accounts tend to reduce your score.
  8. Re-distribute your debt so that no credit card has more than 45% of the credit limit outstanding. Some say you don´t gain points unless it is reduced to less than 30% but it can be a negative if over 50%.
  9. Transfer your debt to a non-borrowing spouse to lower your usage ratios.
  10. Use an instalment debt-consolidation loan to pay off revolving debt.
  11. Focus on paying off collections and charge-offs that happened within the last 2 years first. A month old “paid collection” account actually does more damage to your score than a 4 year old “charge-off”. When paying off old accounts, make the payment conditioned on the status to be reported as “Paid” only and having the ´last active date remain unchanged. Try to get this in writing before you pay!
  12. Never close an old, established accredit account, even if you don´t use it much. Older accounts are an excellent credit score booster.
  13. Start by first disputing items that are over 3 years old and/or are already paid. Creditors have only 30 days to respond to a disputed item before it must be deleted. Usually these records are in a record storage facility, ad they may take a creditor longer to research than the deadline allows.
  14. Borrow against your 401(k9 to pay down accounts. 401(k) loans are usually not reported to the credit bureaus, so this move will improve your credit score.
  15. Pay down accounts with the proceeds of a loan from a small (less than 1000 accounts) lender. They usually only report delinquent accounts.
  16. Apply for a loan within the past 30 days are ignored in the credit scoring model.
  17. Add a spouse, son or daughter on as a co-borrower next time you get a car loan, etc. To help them build credit history. Just make sure you pay these on time or you will hurt your score and there´s.
  18. If you have to do a bankruptcy, only include the items that you cannot afford to pay and leave as many accounts open as possible to help you establish new credit. BK and Forclosures will kill a credit score for up to 7 years and they will stay on your credit report for up to 10 years so don´t do this unless it´s the last resort.

With all of these suggestions, it´s still nearly impossible to predict the effect of an action on your score. Credit score calculation programs are designed to recognize patterns and discern subtle relationships between many variables. For example, simply closing two credit cards not only lowers the number of open revolving accounts (which generally improves your score) but it also lowers the ratio of the amount of available credit compared to your current balances (which generally lowers your scores). This move can also affect the average age of all your accounts (which could either raise or lower your scores). As you can see, one seemingly simple change actually affect a large number of variables in the credit scoring model, so there are no hard-and-fast rules that a certain strategy will affect your score by ´x´number of points. The only assurance you have is that you will end up with your highest possible credit score if you implement at as many of these actions as possible.