Having a high credit score gives you access to more favorable loans, credit cards and more. Employers increasingly screen applicants with a credit report and many insurance companies set your rates or approve your policy based on your credit history. It just makes sense to understand how credit scores work and what you can do to improve yours. Below are proven tactics and strategies that will help you obtain and maintain an excellent credit score.
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You probably already know that lenders use credit scores to determine rates, terms and approvals, and that the higher your score the better. But you may not know how as little as one point can change your rate or approval.
Mortgage lenders generally divide credit scores into groups of 20 points each and assign a risk premium based on how many loans in that score group default or go into foreclosure. This is evaluated on a constant, ongoing basis so the risk premiums can change from time to time. In fact, they were just updated recently.
For example, if the interest rate for borrowers putting 10% down with a 720 score is 5.75% and your score is 719, you will typically pay .125% higher in rate (5.875%). In this case, 1 point matters since it drops you into a lower credit score group. Your score could be anywhere from 700 - 719 and you would get the same rate because this is considered the same risk level group. If your score was in the range of 680 - 699, you would be two credit levels down and will typically pay .250% higher rate (6.00% in this scenario). As you can see, a 21 point difference from 699 to 720 can have a big effect on your rate.
The good news is that in many cases a few simple strategies can quickly improve your score 20 or more points. If you are having thoughts of buying a home or refinancing in the near future (18 months or less), your first step should be to contact an experienced Loan Officer who is able and willing to help you improve your score. For the low, low cost of FREE, you can have an industry expert review your credit and provide a detailed roadmap for success. In addition, you will now have someone you can reach out to with any questions as they come up. I can not stress enough how much help this can be.
The first step is getting a copy of your credit report (with scores) for all 3 credit bureaus (Equifax, Experian & TransUnion). There is no free service I am aware of to get all 3 with scores. AnnualCreditReport.com will only provide the credit reports once a year with no scores and you must fill out a form for each bureau separately. If you want to see your scores you have to pay for them, usually with a recurring monthly fee (This is another advantage of working with a Loan Officer).
I highly recommend CreditKarma.com if you don't already have an account there. They will provide your credit reports with scores for Equifax and TransUnion for free and they're updated daily. These inquires are considered 'soft' so there is no hit to your score whenever you check for updates. When working with clients I usually run one official mortgage report and use CreditKarma to check the progress as we go thru the process. Its only two bureaus but it gives a good indication of where things stand.
Check to see if you are behind on any ACTIVE accounts. Active accounts are ones where you are still supposed to be making payments (and they have not gone into Collections or Charge-off status). Examples of active accounts are car loans, student loans and credit cards where you still have a balance. Even closed credit cards and credit lines are considered active if there is still a balance and monthly payments are expected.
CURRENTLY PAST DUE PAYMENTS KILL YOUR SCORE!
Being behind on an active account has the biggest impact and drags your score down more and more each month it is past due. It needs to be paid up to date immediately and kept up to date with no more late payments. This part of your credit can only get better with time so the quicker your resolve it the faster your score will recover. This is THE MOST important action to take.
I've had many, many clients come to me frustrated with a low credit score even though they never missed a payment. Their Credit Utilization Ratio (CUR) is the reason. The CUR is the second biggest factor in determining your score. This term refers to the ratio of your USED CREDIT to your CREDIT LIMIT. For example, if you have a credit limit of $1,000 and your current balance is $1,000, you have a 100% credit utilization ratio for that account. Paying on time isn't enough to get a high score with balances. To the scoring systems, using a large portion of your credit limit looks risky. Having multiple accounts at or near their limit can really bring your score down.
You want to keep your CUR to no more than 30% for any account. This means that on an account with a $1000 limit, you want to carry no more than a $300 balance. Anything over 30% will chip away at your score. It is typically better to spread your balances over several cards to keep the CUR low than it would be to put everything on one card and use up your total credit limit.
If you are not in a position to pay your accounts down to a 30% CUR, you can still improve your score by getting the balances down as much as possible. For every 10% you can lower your CUR you will see an improvement in your score. So, getting down to a 90% CUR will improve from 100%. Getting under 70% will help more and getting under 50% will have a big effect. Lowering your CUR is one of the fastest ways to improve your score. Once the creditor reports your new balance to the credit bureaus your score can go up. I've seen clients' scores increase as much 60 points in as little as 10 days.
DO NOT CLOSE ANY ACCOUNTS
Closing accounts or lowering your credit card limits will reduce your available credit and raise your CUR. Many people are misinformed and think you are penalized for the amount of credit available to you which is not the case. Its how you use the available credit that matters. In fact, if one of your existing credit card companies offers you a higher limit without a hard credit inquiry, take it. The higher limit will automatically lower your CUR without having to pay it down yourself. This could free up money to pay down other accounts.
Do not pay off installment debt early. Unlike revolving debt, once an installment debt is paid off it lowers your score. Not sure what the logic is but I've seen it in several cases. Of course, it still needs to be paid on time and paid off by the date on the loan agreement. You can pay extra each month without a negative effect but I would use any extra money to pay off revoling debt instead.
Credit Bureaus have been known to get things wrong from time to time so it makes sense to look for anything BAD that doesn't belong to you. If there are GOOD accounts that shouldn't be there you might not want to fight too hard to remove them as your score would probably be lower without them. The exceptions to keeping these good accounts would be if the payments affect your loan approval or the credit utilization ratio (covered above) is high.
If there are accounts that are not yours and you want them removed, you need to dispute them with each credit bureau. With CreditKarma you can easily dispute items for Equifax and Trans Union within your account there. For Experian, you would need to go to Experian Disputes.
In order to maximize your score you need multiple accounts at least 2 years old and a mix of credit types. You will want installment loans, major credit cards, car loans, one or two store credit cards and of course, a mortgage loan at some point.
If you don't have enough credit or you've had bad credit, you will need to add some good accounts to your credit profile. If you are not in a hurry, you can simply open up a new credit card and/or take out a new loan and wait the 6 months to a year for it to positively affect your score. If you cannot get approved for a regular account on your own, you can look at secured credit cards, secured loans and getting a co-signor to help build out your credit history. CreditKarma will reccomend some secured creditors that may approve a new account for you if needed.
Two other options which can be faster, are 'Experian Boost' and becoming an 'Authorized user' on someone else's already established accounts.
Experian Boost:
According to them;
This only works for one of your scores (Experian) but it can still be useful. Mortgage companies use the middle (not the average) of the three bureau scores as your 'credit score'. For example, if your scores are Equifax 716, Experian 697, TransUnion 699, we would consider your credit score to be 699. If the Experian Boost raises your score just 3 points, your Experian score is now 700 and that becomes the score we would use to determine your interest rate and approval level."Experian Boost allows you to improve your credit scores and build credit history using utility, telecom, rent and streaming service bills you pay every month. Experian Boost works by connecting to your bank and credit card accounts to find qualifying on-time bill payments and, with your permission, adding those payments to your credit file."
Authorized User:
If you have a family member or a close friend willing to add you as an "Authorized User" on their account, you get the immediate benefit of their credit history for that account. This has been a loophole in the system for many years but still works at the time of this writing. If their account has 10yrs history of perfect payments and a low CUR you will now have that history in your credit profile. You can be an authorized user on multiple accounts which will build out your credit profile right away. The downside is that if they miss any payments in the future or charge up their balance your score will be affected.
The credit bureaus are supposed to remove both good and bad accounts from your credit report 7yrs from the date of last activity (Except for Bankruptcy which is 10yrs). The last date of activity is the date the account is closed or the date the account was charged-off or first went into collections. Sometimes this doesn't happen so you need to review your report and dispute anything (bad) that should be removed due to its age.
Another thing to look out for is the transfer of collection accounts from one company to another or a new collection added to your credit for a debt that is already over 7 yrs old. This happens quite a lot where the account was charged-off more than 7yrs ago and a new collection company is involved. They will report the account as recently opened (the date they got it) and this will hit your score pretty hard. You would dispute this with whatever credit bureaus are reporting it and they should remove it.
Generally, as far as your credit score goes, if you concentrate on the above strategies you can usually leave these alone (other than disputing the 7yr old ones). However, if the creditors are pursuing legal action against you, you should speak with an attorney and not ignore them. The effect on your score diminishes over time even if they still have a balance so it might be better to simply wait 7yrs for them to drop off your credit instead of paying them. Depending on the balances, age of the accounts and your timing for getting a mortgage, there may be situations where they need to be dealt with now, but that is a case by case basis and should be reviewed with a loan officer.
Sometimes creditors will offer you a deal to settle the account for less than the balance and it can make sense to accept their offer. If they are willing to accept 'Pay for Delete' this can really make sense. Pay for delete is just like it sounds, you pay it, they delete it from your credit. Deleting the account is like it never happened so any negative effect to your score would be completely removed. This is different than settling or paying it down to a zero balance where the account remains on your credit and still has some (but less) negative effect on your score.
The point here is you do not need to clean up all your past bad stuff in order to get a good score. You just need to stop any new bad stuff from showing up and you need to have at least 3 to 4 good, active accounts reporting on your credit.
Not all inquiries are the same. 'Soft' inquiries do not affect your score. Soft inquiries are inquiries where you are montoring your credit or checking your overall credit worthiness without applying for a specific account. 'Hard' inquiries (where you are actually applying for a new account) do hurt your score. And there is a difference among hard inquries as to how much your score is affected. Mortgage inquiries will only lower your score by 3 points. Credit cards and personal loans can be 7 more more points.
Hard inquiries generally affect your score for 24 months (although the effect diminishes over time) so its best to limit inquiries to only what is absolutely needed.
DO NOT SHOP FOR A CAR
If your goal is to improve your credit so you can buy a new home, buy the home first then the car. Shopping for a new car can hurt you 3 different ways; 1) the inquiries from each car dealership, 2) the initial negative effect of opening a new credit account, and 3) the new car payment will usually be higher than what you have now and can affect your loan approval.
If you must buy a car, do not let anyone run your credit until you have chosen the car AND negotiated the price. I've seen clients' scores drop over 70 points from car shopping because each dealer told them they needed to check their credit to give them the best deal. It would be bad enough just having each dealership run your credit but many dealerships 'shop' your credit to multiple banks, each of whom run their own credit. So a trip to one dealership can result in 4 or more inquiries hitting your score. Visit 5 dealerships and this could be over 20 inquiries. You can avoid this by simply telling them your are already pre-approved by your bank. Once negotiations are done and you want to consumate the deal, then you can talk to them about the financing and running your credit.
Six months ago. Since that is no longer an option the next best time is today. If you've struggled with your credit in the past, getting a high score may seem like a daunting task but the truth is most people can see a big jump in less than 6 months following the above steps. No matter how bad your credit is, you can completely change it within 2 years if you start today. If you have any questions please feel free to reach out via the 'Contact Us' form.