With every point of your credit score being more crucial than ever, I thought it would be a good time to share some tips on how to improve your credit scores beyond paying your bills on time. If you are considering obtaining a mortgage within the next 12 months, you should meet with your Mortgage Professional to help advise you on this process. Some steps in repairing your credit may actually temporarily lower your scores (such as paying off a collection). What steps you should take depends on how soon you plan on buying a home or refinancing.
- Obtain a copy of your report from www.annualcreditreport.com. You are allowed one free report from each bureau annually. This comes out to three free reports. I recommend pulling one report at a time rotating the three bureaus every four months. For example, this month, you could access your Experian report to review your credit and in May, pull your report from Transunion. In September, you could obtain your report from Equifax. This allows you to keep tabs on your credit for free throughout the year. NOTE: The bureaus will charge you a fee to access your credit scores (stinky, IMHO); if you’re really interested in obtaining your scores, I suggest you contact your Mortgage Professional and request a tri-merge report. The cost should be around $20 and the scoring modules used for lenders is different than what you receive from www.annualcreditreport.com.
- Review your credit report for errors and contact the creditors demanding they be corrected. The contact information should be included with your credit report. Keep a phone log of any conversations and follow up with a certified letter. Request a confirmation letter for your records of any corrections the creditor offers to make.
- Pay past due accounts current. Your credit score is penalized for any accounts carrying a past due balance.
- Keep your balances below 50% and 30% of their credit limit. Review your credit report to see which accounts are just over 50% or 30% of the available credit line. For example, if you have a credit card with a $1000 credit limit, and the balance is $550 pay down the account to where it stays below 50% of the line ($500 or less). NOTE: If you’re trying to reduce your credit debts, you should use a different strategy than maximizing your credit scores.
- Don’t close your old accounts in good standing. The scoring modules favor established credit and not new debt. Keep your old card with a zero balance and use it once a month to fill your tank with gas and then pay it off each month. Also, closing your accounts do not make them “go away” from your credit report.
- Avoid obtaining new credit. That new car will not only dramatically impact what you qualify for, it will also zap your credit scores as a new maxed out debt.
- Before paying off old collections, contact your Mortgage Professional. Depending on your scenario, you may be better paying off the collection after closing on your new mortgage than before. The credit scoring modules will factor paying off the collection as new activity and ding your score as if the collection is currently “active”. I actually had a loan declined last year after a client returned a library book that showed as a collection against my advice. He just needed to wait until after closing (this was a condo conversion and there was a large time span for closing).
- If you’re allowing different LOs to pull your credit while “rate shopping” for your lender, do so during a short window (30 days) of time to avoid being hit for inquiries.
The good news about your credit score is that it is not permanent. It’s intended to reflect your current credit behavior. If your credit is a mess, it will take more time, effort and determination to repair it…but it can be done!