Coca-Cola won’t reveal its secret ingredient, Colonel Sanders keeps his special combination of spices in a vault, and Moish the Morasha baker won’t tell anyone the secret recipe for his delicious cinnamon buns.
Likewise, no one seems to know exactly the formula for how the credit agencies determine people’s credit scores. Credit repair specialists have a general idea of how certain events will impact a persons credit score, but there’s no way to know exactly how many points one’s score will drop because of a specific event or how many points it will increase when somebody takes certain actions.
Considering how important the credit score can be to someone purchasing a car or a home, it is imperative to do all you can to get the highest score possible. Does it really matter how high your score is? If you were seeking to refinance or purchase a home and your credit score is below 620, you may not even be able to get a mortgage at all. If your credit score is below 720, even if you have high income and a low loan-to-value, your interest-rate is likely to be higher than if you have 780. The savings over the life of the loan could be significant. Furthermore certain banks will not even permit certain types of mortgages when the score is below 700. So, yes, the credit score is very important. Here are some important ideas and tips to consider in regards to your credit scores and how to improve them. We will address both people who are new to world of credit and people who have suffered and who are trying to repair their credit.
Scores will typically drop significantly due to bankruptcy, short sale or foreclosure. It is hard to win back those points. However, the first step is to request your credit and confer with an established credit repair company in order to help you on the road to better credit scores. If you are new to the world of credit, you also may have challenges to get a high credit score.
Request your own Credit Report. It is important you request your credit rather than have a third party obtain or “pull” it. Third party pulls will hurt your score and every point counts. Go to www.Myfico.com and order both the report and score. The report is important because it will tell the credit repair professional why your scores are low and provide a road map to potential improvement. It is important to recognize that you may have to wait a lengthy period of time before you obtain acceptable scores. However, a professional may find a way to help and the sooner you start work on rebuilding, the sooner your scores will improve.
If you had a complicated tax situation, you wouldn’t use a computer program to do your tax returns. You would seek out a professional. Rebuilding your credit scores is hopefully something you will only have to do once in your life. Seek out a professional and have him review your report. I had a borrower with a 691 and we required a 700 score to approve his mortgage. By working with a credit repair company, we raised his score to over 770 in 30 days. Unfortunately, very often when someone tries to address their credit issues with the credit agency, they cause more damage by making certain damaging statements that become part of the official record.
Correct mistakes and negative items. The first order of business is to make sure there are no incorrect items on the report. This is where a professional will be most helpful. If you filed for bankruptcy, were all the discharged items indicated as discharged? If a debt still shows open, it needs to be corrected. Many credit reports show small open judgments like medical bills that people don’t realize exist. You may have thought the insurance company was paying the entire bill and ignored the note from the doctor which was later followed by a statement from the collection agency. Now you have a $100 judgment which is hurting your credit and needs to be paid. Another borrower with this same problem couldn’t be approved while his report showed a judgment. By addressing this early it removes the issue when you are trying to get approved and helps your credit score so that it is sufficient when the lender pulls your credit.
If you have had recent financial difficulties, you may assume your credit scores are ruined forever and feel you have no hope of repairing them. You may fear ordering your scores for fear of seeing low numbers. That is the exact time to review the damage and start on a plan to repair and rebuild.
Obtain a secured credit card and a secured loan. You may have a debit card because you don’t want to get started with credit cards again. Credit is what got you into this mess. While wanting to avoid repeating old mistakes is commendable, debit cards won’t help you rebuild your credit score. A secured credit card is one where you deposit a small amount to a bank account (as little as $200 or less) and the credit is limited to that amount. You won’t be able to owe a high balance because the bank won’t let you past the $200 limit. This will help you start to rebuild your scores. If you are new to credit, you will likely be able to get a credit card, but in case you have a problem, you can consider this option.
Varied Accounts. Getting one or two credit cards is not enough. Try to get other types of accounts. Credit agencies like to see you have credit cards, installment loans, car loans etc. The more types of credit you are responsibly using, the quicker your scores will climb. As is true with regards to secured cards, banks will issue you a secured installment loan. I understand you don’t want debt, but it is important in the overall path to financial strength.
Open Credit. Okay, so you will get these credit cards and loans, but you don’t want to use them. You are like a gambler who must stay away from the casino. Unfortunately, if you don’t show the credit agencies you are responsible, you won’t help your scores. You will need to use the cards and pay them back. Again, you can keep the limit very low and make it a priority to pay these cards every month. If you are trying to build your scores, this is very important. Use your credit and pay it responsibly.
Loan balance to limit. It is better to have two cards with low balances relative to the limit than to have one that is almost maxed out. Your scores will do better if you can remain at 30% of the limit (i.e., $3,000 balance due on a $10,000 limit). Many people like to use just one card. To help your scores, use more than one card so the balance on any one card remains below 30% if possible.
Authorized User Here is a little known fact I learned from a credit repair company. The credit agencies also look at the age of your credit. If you are just starting out, or have given up all your old credit and are starting fresh, this will be reflected in your scores. However, once you have a credit card, you can sneak into the aged status by becoming an authorized user on another person’s card. This should help you get some benefit from their aged cards.
So while we don’t know exactly how all these strategies will impact your scores, we do know generally that they will move them higher. And just like we don’t have to know how to bake the cinnamon buns to enjoy them, as long as we get the credit scores high enough to get the rate and approval we want, we don’t need to know the exact formula.
David Siegel is a Home Lending Officer with Citibank in its Englewood office. Siegel can be reached at [email protected] or 201-419-1330. NMLS# 277243
By David Siegel
