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Improve Your Credit Score

How To Improve Your Credit Score 

Many individuals today have blemishes on their credit reports. Whether it’s from a dreaded case of Identity Theft, incorrect reporting by the credit bureaus, or not being punctual about paying bills on time, these credit mishaps can cost an individual thousands of dollars in interest if not corrected.

Here is a brief explanation of the slides in the power point presentation How To Improve Your Credit Score:

Slide 2 – What makes up a credit score? A credit score is calculated from five components. Payment history (35%), balances carried (30%), credit history (15%), mix of accounts (10%), and inquiries (10%).

Slide 3 – Payment history is based on paying bills as agreed and on time. The majority of the payment history is based on the most recent six months, the next six months, then the next 12 twelve months. The highest weight is on accounts with the largest payments. For example, a mortgage loan would be rated first, then the next biggest payment whether it is an auto loan or credit card would rate next.

Slide 4 – Balances carried is rated based on the balance to credit limit ratio. Since this component makes up 30% of the credit score, it is the second most important factor in determining your credit score. Keep the balance to limit ratio below 30%.

For example:

Credit Card Balance Credit Limit  Ratio

Visa $4,000 $10,000 40%

Mastercard $5,000 $10,000 50%

Discover $0 $10,000 0%

Total: $9,000 $30,000 30%

The balance to credit limit ratio is calculated on each individual account and in total. While the total balance to limit ratio is only 30%, the Visa and Mastercard accounts both exceed 30%. This would result in a lower credit score.

If the balances were divided equally between all three accounts with $3,000 on each card, the balance to credit limit ratio would be 30% on each individual account and in total resulting in a higher credit score.

It is important to note, mortgage and installment loans do not impact with the balances carried component as much as revolving credit balances.

Slide 5 – Credit history simply means the length of credit history. The longer an account has been open the higher the credit score. However, to achieve a higher credit score, the account needs to be paid in a timely manner.

Additionally, many people have been advised to close old accounts that they don’t use. WRONG! This can actually have a negative impact on your credit score. Never close old credit accounts, especially those with a good long history. Plus, closing old accounts increases the total balance to limit ratio which also has a negative impact on your credit score.

Slide 6 – Mix of accounts. The ideal credit score is made up of both installment and revolving accounts as shown below:

-Mortgage Loan

-Auto Loan

-3-5 Credit Cards (Or More)

Additionally, when obtaining a Home Equity Line of Credit (HELOC) apply for a loan amount greater than $40,000. If the HELOC is > $40K, it will fall into the mortgage category. If the HELOC is <= $40K, it will be classified as a revolving account and impact the balance to limit ratio. Since the payments on a HELOC are calculated on the outstanding balance and not the limit, the larger limit doesn’t cost anymore than a smaller limit. With many homeowners consolidating credit card debt utilizing a HELOC, this is an important issue and remember not to close the accounts.

Slide 7 – Inquires have several factors to consider. First, multiple inquiries made by mortgage lenders or for a car loan made within forty-five days will only count as one inquiry. Second, each inquiry made reduces a credit score on average by about five points. After ten inquires per year, inquires will no longer affect the credit score.

Slide 8 – Several types of inquiries do not affect the credit score at all. A job related inquiry, an application for insurance, for a new utility account (e.g., phone, cable, etc.), and promotional pre-approved credit card offers do not affect the inquiries calculated into the credit score.

Slide 9 - Blemished credit can be very costly and can result in higher interest rates on mortgage loans, auto loans, credit cards, and insurance premiums. By taking the following steps to improve your credit score, you could save hundreds even thousands of dollars over the term of a loan.

Slide 10 – Here are five simple steps to raise your credit score. 1) Pay past due accounts, 2) correct erroneous late payments, 3) have credit limits increased, 4) become an authorized user, and 5) do not close old accounts. Let’s take a look at each.

Slide 11 – Pay all accounts that show a past due balance on your credit report. Past due accounts do not necessarily mean 30 days late, past due accounts can be 1 day late and show as past due on a credit report. This can severely hurt a credit score. Pay all past due accounts as quickly as possible to increase your credit score.

However, past due accounts do not include judgments and collections. It is best not to pay judgments or collections before applying for a mortgage. Fannie Mae’s automated underwriting program does not require collection accounts totaling up to $5000 to be paid off. Paying judgments or collections has a negative impact on the credit score as the “recent activity” date will updated and the collection will appear to be more recent.

Slide 12 – Have erroneous late payments removed by contacting creditors and requesting to have any late payments removed. If your first attempt is not successful, try again and work your way up to a manager. Be persistent and be sure to obtain the name of the representative that you spoke with as well as a contact number and extension in case you need to follow-up.

If you are successful and the creditor agrees to remove the late, be sure to request a letter. The letter needs to be on the creditor’s letterhead, needs to be signed by an employee, and the letter must document your name, address, account number, and the specific late payment(s) that should be removed as paid late.

The creditor should notify the credit bureaus and have the late payment(s) deleted from your credit report. However, many creditors fail to report corrections and you will need to send a copy of the creditor’s letter to each credit bureau.

Slide 13 – Increasing your credit limits can increase your credit score. Every six months or so call each creditor and request that each increase your credit limit. Be sure to request that the increase be made based on your great payment history. If the creditor insists that a credit report must be pulled, think twice before you agree as this will count as an inquiry and will have a negative impact on your credit report.

Slide 14 – Become an authorized user on a relative or friend’s credit account. However, be sure to confirm that the account has been paid on time and the current balance to limit ratio is below 15%. If the account has late payments or has a high balance to credit limit ratio, it will have a negative impact on your credit report.

There is no risk to your relative or friend as the credit card is mailed to the account holder and you cannot use the card unless they provide you with the card. Plus, you should not ask to use the card.

Slide 15 – Again do not close accounts even old accounts that you no longer use should not be closed especially those with a good long history. Keep accounts open and use accounts that have become inactive periodically (2-3 / Yr.). However, if you charge on the account be sure and pay the balance in full as soon as the bill arrives. Purchasing a tank of gas and paying it off will activate inactive accounts and report them current and in good standing. Remember, closing old accounts increases the total balance to limit ratio which also has a negative impact on your credit score.

Slide 16 – Summary: To achieve a higher credit score try to do the following.

Borrow money when you do not need it, when you do need money creditors may not lend it to you. Keep the balance to credit limit ratio below 30%; do not max out credit cards to the limit. Spread your credit card balances over several accounts.

When a creditor removes a late payment(s) and provides a letter, you can request a credit rescore for a quick boost to your credit score. For a fee of $30 per account per credit bureau, The credit bureaus will recalculate your credit score in just a few days, and this could help you obtain a better interest rate.

It is best to never payoff a judgment or collection before applying for a mortgage. If necessary, judgments and collections can be paid at the closing. Overall, it pays to invest the time to clear up the blemishes on your credit report.

CrossCountry Mortgage, Inc.
99 Rosewood Drive, Suite 225, Danvers, MA  01923
Office:  (978) 548-4467
Jeff@JeffPalermo.com
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