How to Improve Your Credit Score
A good credit score can mean the difference between a low mortgage rate with conventional financing and a restrictive, higher-rate loan. There are some simple but very important steps you can take to improve your credit.
A good credit score can mean the difference between a low mortgage rate with conventional financing and a restrictive, higher-rate loan. There are some simple but very important steps you can take to improve your credit.
- Look for any past due balances on the credit report and bring them current.
- Reduce all outstanding debt to as close to a zero balance as possible. If unable to pay all debt down, evenly distribute any remaining debt among open credit cards, or consider opening a new line and transferring some of the balances. Try to keep balances below 50% of available credit; below 30% would be even better. Do not close existing accounts.
- If married, keep separate credit cards. This provides flexibility in transferring some or all of the balances to one spouse to increase the credit score of the other. This provides the possibility of one spouse becoming the sole borrower and it does not change the ownership of the home.
- Request an increase in available lines on cards to reduce debt ratio, but only if your credit card company can do that without a hard credit inquiry.
- Pay off past dues and charge-offs within the last two years. Beyond two years, it will have no impact on your score if wiped out. In fact, the act of paying it off can actually take your score down temporarily.
- Request that creditors and credit bureaus delete any outstanding debt that is incorrectly charged to you or has yet to be cleared. They have an obligation to react within 30 days. If you choose to pay off an outstanding debt (less than two years old) mark the back of the check “accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit.” You may be able to use the canceled check if the outstanding debt is not removed.
There are five factors that impact consumer credit scores.
They are listed here in order of importance:
Payment History has a 35% impact. Paying debt on time and in full has a positive impact, and late payments, judgments and charge-offs have a negative impact.
Outstanding Credit Balances have a 30% impact. Debt ratio of outstanding balance to available credit is important. Keeping that below 50% is wise and below 30% even wiser. It is never a good idea to close an account; the debt ratio will go up and the number of seasoned lines will decrease. Pay outstanding debt down as close to zero as possible and evenly redistribute the remaining balance among the open lines. The increased interest incurred by moving a balance from a 0% card to a 23% card will be minimal relative to what the increased mortgage debt might be with a low credit score. Hitting the maximums of available credit can be very negative. It may be worth calling and asking the credit company to increase your available credit to lower the debt ratio, provided they can do so without a hard credit inquiry.
Credit History has a 15% impact. The length of time a particular credit line has been opened is important. A seasoned borrower is stronger.
Type of Credit has a 10% impact. A mix of auto loans, credit cards and mortgages is positive, rather than a concentration in credit cards only.
Inquiries have a 10% impact. Hard inquiries for credit will negatively impact the score. Auto and mortgage inquiries receive special treatment and 20 inquiries can be made in a 14-day period for auto or mortgage and will be treated as only 1 inquiry. The maximum number of inquiries that will reduce the score is 10. Any inquiries beyond that [11+] in a six -month period will have no further impact on the borrower. Each hard inquiry can cost 2-50 points on a credit score.
