Many tools are available to mortgage lenders and one of the tools I often use in my business is a Credit Analyzer tool provided by Advantage Credit of Colorado. By utilizing this tool and the experience gained from working with many customers, I have found ways to improve credit scores quickly to help in qualifying customers for better rates and mortgage loan options.
Let’s talk about two great things to quickly improve your score, and also one change that most believe would improve your score but actually reduces it.
Improve Score #1: Pay off any past due balances. When a company you owe payments to reports a past due balance, but not a late payment, the credit score can be impacted drastically. I have a customer I am working with currently that had a late payment on a credit card. By paying off only the past due balance and updating the credit report, the score jumped 48 points, basically overnight. The key to this was that the 30 day late payment had not yet been reported because the customer was not yet 30 days past due, but rather somewhere between 1 and 29 days past due. Never pay past 30 days or your score will drop drastically and will have very few options to get that late payment removed from your credit.
Improve Score #2: Adjust your balance to limit ratio. In other words, if you owe $500 on a credit card with a limit of $1,000, you have a 50% balance to limit ratio. The way the scoring model is set up, credit scores decrease when you are above approximately 30%. When I tell customers about this, their typical response is, “well, great, I don’t have $3,000 to lower my credit card balance so there isn’t anything I can do about this”. I have a solution. Contact your credit card company and ask them to do a review of your account. Assuming you have made on time payments and have been with them a while, they will see that you are a good customer. After the review of the account, ask them for an increase on your credit limit. Have a particular limit in mind to get you below the 30% ratio and your score will likely increase. This will take some self control since you are increasing the amount you can borrow. Just remember to stay below the 30% ratios on all of your cards. Another idea, if they wont adjust your limit is to use your credit cards together. If you have a credit card with a $0 balance, another with a small balance and then the one you use for most of your purchases, you can do balance transfers to keep all of your cards to the 30% ratio. It is an individual calculation on each card, not an overall. I have seen this change impact scores by as much as 75 points!
Beware Tip #1: When people have faced credit challenges in the past collection accounts are normally on their credit report. When looking to obtain a mortgage, collection accounts will normally need to be paid off (although there are exceptions to this and you should talk with a mortgage lender for further guidance). How does paying off a collection account impact your score? You are paying off a bad debt, so it should increase, right? You would think so, but due to the way credit scores are calculated, it typically decreases your score. Here is why. A collection account is a debt that was never paid and the original credit sold the bad debt to another company to hopefully collect it from you some day. These bad debts are normally sold to collection agencies for pennies on the dollar. Normally collection accounts are months, if not years, old. The impact of a debt, good or bad, decreases over time. So a collection account that once impacted your score by, maybe, 100 points, after a couple of years may only impact your score 10 points. If you pay off the collection accounts, to settle your outstanding debt, make things right and improve your credit score, you are updated the last active date on the debt, making it current again. Since it is current, the impact on your score is very close to what it was when it first hit your credit, even though it is paid now. Showing a collection account paid, can actually decrease your score by as much as it did when it originally got reported on your credit. You get around this by having a smart mortgage lender who has you pay the collection account at the time of closing to satisfy the mortgage underwriting requirements, while not reducing your score to impact your ability to get a good rate or good financing terms.
Hopefully these tips come in handy for you when you are looking to obtain credit of any kind.
Lending a hand,