Part 2 of the Credit Score series
Repairing damaged credit is a bit like trying to lose weight: You need to put in time and effort. There really is no quick way to fix a credit score. As a matter of fact, out of all of the ways to repair or improve credit, quick-fix attempts may just backfire. Manage your credit responsibly over time, and you may see an improvement in your credit score. If by some chance you run into credit bumps, follow the suggestions below to try and jack up your credit scores.
Three things to do right now, in order of importance:
Review your credit report—Request a free copy of your credit report and review for errors. What kind of errors? Late payments, collections, write offs, unauthorized charges, erroneous charges, balances etc. Dispute any errors directly with the creditor and notify the reporting credit bureaus.
Pay reminders set ups—Many banks have systems in place to remind you to pay, and can be set up to automatically pay your bills. Preventing late pays is a great way to maintain your score.
Chop your debt—I know, I know. Easier said than done, but a good way to jack a score upwards. Balance out the debt so you go below 50% of the maximum credit, or just
stop using your credit cards. Design a payment plan to pay the higher-interest-rate cards first, while reducing minimum payments on your other accounts.
Be aware that the two most important components of your FICO are payment history and balances owed.
Payment history is 35 percent of a FICO Score calculation, and has the greatest effect on improving your scores. Missed or late payments are not easily fixed. What falls under payment history?
Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO Scores. Missed payments, should be history. Get and stay current.
The longer your history of on-time bill payments, the more your FICO Scores should increase. Older credit problems are less of a factor. Past credit issues may fade as time passes and good payment patterns emerge. Paying off a collection account does not remove it from your credit report; it usually stays on your report for seven years. It may be better to contact a credit counselor before you go into a hole. While this doesn’t improve your credit score, assistance can act as preventative medicine and prevent financial hemorrhaging and allow you to maintain your score with a possible upside.
Balances owed are 30 percent of a FICO Score’s calculation, and may be a bit easier to clean up than a payment history. How to clean? Maintain low balances on credit cards and other “revolving credit.” High outstanding debt can affect a credit score. Paying down your revolving (credit cards) debt is the most effective way to improve your credit. Maxing out one card, even with other low-balance cards, may lower your scores, so spread it out below 50% of the max line amount. Closing unused credit cards, as a short-term strategy, may lower your scores.
Opening a number of unneeded new credit cards, to increase your available credit may lower your credit scores.
General Credit Tips
Don’t open a lot of new accounts too quickly. Rapid account build-up may lower the average age of your trade accounts, which may have a negative impact on your scores, if you don’t have a two- to four-year credit history. It also arouses an underwriter’s suspicion.
Rate shop within a condensed period of time. Why? The FICO algorithms distinguish between a search for one type of loan vs. a search for many different types of credit lines.
Focus on re-establishing your credit history, if you had past problems. Opening new accounts and paying them on time can raise your credit score in the long term.
If you are busy and need to “repair” or improve your credit, it may be better to hire a credit repair agency to assist you. There are many out there that charge from thousands of dollars to smaller monthly retainers. I can’t vouch for them all, but if you need a suggestion feel free to contact my email.
By Carl Guzman
Carl Guzman, NMLS# 65291, CPA, is the founder and President of Greenback Capital Mortgage Corp., a Zillow 5-star lender http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y. He is a residential financing expert and a deal maker with over 26 years’ industry experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com [email protected]
