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>> 7 Simple Tips to Raise Your Credit Scores7 Simple Tips To Raise Your Credit Score What does your credit score really mean? Mathematical formulas determine your creditworthiness Equifax, Experian, and TransUnion are the three major credit bureaus to which your creditors report your payment histories. Credit scores are commonly referred to as FICO scores. FICO is a brand name (like Kleenex or Q-tips), but the term is widely accepted in the industry to mean “credit score”. A FICO is intended to answer one question only: What is the likelihood that a person will default on his credit responsibility? The answer to this question is found using statistics and probability equations. This report will reveal several “tricks” to manipulate the FICO mathematical formula and improve credit scores. The components of your credit score The FICO building blocks To alter your score, you must first understand its components.Your credit score is built from five categories, each varying degrees of importance. The Five categories are: Ø Payment history Ø Amount owed vs. credit limits Ø Length of credit history Ø Types of credit used Ø Age of credit/inquires of credit Payment History analyzes your ability to make payments on time for all types of accounts – mortgages, automobiles, credit cards, consumer finance cards, installment loans, and other credit accounts. Amounts Owed reflects outstanding liabilities. For installment accounts, a low balance versus the original amount borrowed is considered positive. For a credit card, a low balance versus the card’s credit limit is considered positive, as is a low total balance versus total credit on all open accounts. Length of credit history measures the time period over which a person establishes himself as a responsible user of credit. The longer a credit account is open and used responsibly, the more positively a person’s credit score is affected. For example, an open credit card account that is paid on time for many years is a positive influence on a person’s FICO scores. Types of credit reflect the total number of accounts in use and their associate credit types. Mortgage and installment loans are considered the most positive of the account types whereas credit cards and consumer finance cards are considered among the weakest. New credit considers the number of recently opened accounts and the proportion of recently opened accounts to total credit lines. It also considers the number of recent credit inquiries. FICO is non-biased and only reflects “credit worthiness” Consumers are protected from bias and profiling Your credit score is unaffected by non-correlated personal traits or lifestyle choices. Your FICO scores are not influenced by any of the following items: Ø Race, color, religion, nationality, age, sex, and/or marital status. Ø Your residence Ø Your occupation, title, or employer Ø The interest rate charged on any of your existing or prior accounts Ø Inquiries for “pre-approved” credit offers Ø Inquires marked as originating by employers Ø Inquires made to view your own credit report from an authorized credit reporting agency FICO does not reflect key mortgage approval elements Non-FICO items may still impair ability to get mortgage approval A mortgage approval will consider credit scores as a main factor, but will also consider other key items that are not calculated in the FICO formula. The following non-FICO items are key elements in the mortgage approval process: Ø Your income Ø Child support or other family obligations Ø Employment history Ø Status as a credit counseling participant Your income and child support obligations directly influence your ability to repay a loan so it should be easy to understand how those two items can affect your loan approval. Employment history is not as obvious a factor, but a steady employment within one industry is more favorable than multiple jobs across multiple industries in a short period of time. Predictable employment histories result in predictable income patterns and, therefore, lower risk. Your status as accredit counseling participant is not so obvious. As a participant in Consumer Credit Counseling Services or other debt management programs, a person enter into a quasi Chapter 13 Bankruptcy which is obviously not favorable to credit worthiness. In fact, because CCCS is structured very similarly to a Chapter 134 Bankruptcy, most mortgage lenders treat the owner of those accounts as an actual Chapter 13 participant and are likely to deny their mortgage application. Credit Tip #1: Credit scores operate on a 2-year window A credit blemish is rarely permanent Derogatory items will remain on your credit report for seven years, but the impact they will have on your FICO is negligible after just two years. The effect of a missed mortgage payment on your FICO will decrease over time until it has no effect at all. Remember that a FICO score is a probability – it measures the likelihood that a person will default on his credit obligations by 90 days. If a person just missed a mortgage payment last month, he is much more likely to default over the next 90 days than a different person who missed a single payment 18 months ago. In categorizing missed payments and other derogatory credit item, each item can be characterized by its three traits – Recency, Severity, and Frequency. Recency reveals the elapsed time since the adverse credit item The first six months after a derogatory item are critical. After that milestone date, the item’s impact lessens considerably. Statistically, this makes sense – a person demonstrates that adverse item may have been isolated. A strong payment history is the best indicator of future payments. Severity reveals the magnitude of the adverse item It is never considered “good” to miss a credit payment, but there are always degrees of damage. For example, it is much worse to be 30 days late with a $500 auto payment versus a $50 gas bill payment. The larger payment is more severe. It is considered very severe to miss a mortgage payment, no matter the payment size. Frequency reveals how often adverse credit items appear The more often derogatory credit items appear on a person’s credit report, the more of a credit risk that person becomes. For example, one missed mortgage payment can be excuses as an isolated incident in an otherwise perfect payment history. Multiple missed mortgage payments, however, indicate a pattern. A person whose credit lines frequently report adversely is more likely to default on mortgage payments over the next 90 days than a person’s whose adverse items were isolated. Credit Tip #2: Always pay your mortgage payment Never, ever, ever miss a mortgage payment This point should be self-explanatory. The best demonstration that your mortgage will be current in the future is to have paid your mortgage as agreed in the past. While it is never a good idea to skip scheduled payments to any creditor, remember that a credit card company will not revoke your credit if you are late. Similarly, the gas company will not shut off your heat if you are late. Your mortgage company may take your house, however. To be extremely clear on this point: All creditors are not alike. It is forgivable to be late in paying your Visa: it is forgivable to be late making you car payment. A mortgage lender will not forgive a missed mortgage payment. At least, not until you have sufficiently re-established yourself as a good credit risk. If cash flow is extremely tight, call your creditors and make mortgage payment arrangements or alert them about late payments. It may save you late payment charges, but it may save your derogatory credit item from being reported to the major credit agencies which will lower your credit scores. Credit Tip #3: Late mortgage payments are not really “late” Mortgage lenders’ late charges begin on the 15th; credit agencies consider it late on the 30th If your mortgage payment is due on the 1st of the month, you have a 15-day grace period in which to make your payment. After the 15-day grace period, the mortgage company will levy a late charge but your mortgage is not technically late – at least not by credit scoring standards. The credit reporting agencies consider an account to be delinquent after 30 calendar days, not 15 days. Therefore, if you have credit cards due on the 20th of the month and need to hold your mortgage payment off until the 28th to meet your obligations, you can choose that route and not worry about affecting your credit score. You will incur late charges, however, from your mortgage lender. To summarize, if your mortgage lender tells you that you are late on a payment, don’t panic. You have 30 days to make yourself current. Of course, the best route is to pay your bills before incurring late charges, but this tip may be helpful for months in which cash flow is tight. Credit Tip #4: Limit your credit inquiries Applying for too many credit lines can trigger suspicion When applying for any credit line, your credit scores will be negatively impacted. The effect will be small at first, but it will increase with each new application for credit. To understand why this occurs, consider the profile of somebody who is seeking credit. A person in need of additional credit lines is less creditworthy than somebody whose existing credit lines are ample. For example, a person seeking additional credit may exhibit any of the following “high risk traits”: Ø Currently facing cash flow problems Ø Planning to spend a large amount of money Ø Could not get credit limit increase from existing credit card accounts In other words, most people do not apply for credit when they are planning to decrease their monthly spending. Applying for new credit lines is a signal of a weakening financial position. Do not be nervous to open new credit card accounts or to shop for new cars – just do it intelligently. And, most importantly, do not apply for new credit lines within several weeks of applying for a mortgage or between the period after applying and closing on your new mortgage – you want your credit score to remain as high as possible during this period. Credit Tip #5: Stay away from your credit limits Maintain low balance-to-limit levels If you carry a credit card balance at or near your available credit limit, you may be showing an inability to manage credit responsibly. A person that carries high credit balances is not necessarily in danger; it is the person who carries high balances versus the credit limit on a specific card. For example, to carry a balance of $500 is acceptable if the credit limit is $20,000. It is not acceptable if the credit limit is $500. Many department stores offer in-store discounts when opening a new, store-branded credit card. These cards typically have low credit limits, however. By spending $300 at the store, you may be using 100% of your available credit and be drastically influencing your credit score. At the time of purchase, ask the cashier about the credit card’s limit. If he does not know the answer, call customer service or wait for your first statement on which the credit limit will be clearly marked. Credit Tip #6: Request increases for your credit card limits Decrease your balance-to-limit levels without paying a bill The easiest way to increase your credit score can be handled in 2 minutes. On the back of every credit card that you use, call the customer service number and ask a representative to increase you credit limit. Some representative will increase your credit limit at the time of the request. Others will require a formal request in writing. Each year, you should make such requests. A higher limit will lower your outstanding credit to limit ratio. By increasing your credit limits, you decrease the ratio of used credit to available credit. The only other way to achieve this objective is to pay down your bills. Instead, you raised your limits. It is extremely important that you follow this script when asking for a credit limit increase. You: “I’d like for you to evaluate my credit worthiness for a credit limit increase.” Them: “Okay. How much of an increase would you like?” You: “As much as you can give without pulling my credit report.” The key is to have your limit increased without allowing a new credit inquiry to be made. If a credit inquiry is made, a notation will be made on your report and your score will be negatively affected. If the credit card issuer cannot increase you credit limit without reviewing your credit scores, thank them for their time and hang up the phone. Credit Tip #7: Don’t close old credit card accounts Closed accounts negate a potential FICO gold mine If an unused credit card does not have an annual fee, do not close the account – you are missing an excellent opportunity to improve your credit scores. Instead of closing the account, change your usage habits. Once each month, use your old credit card to buy a pack of gum or a gallon of milk. Then, when your monthly statement arrives, pay the bill in full. This simple credit management step accomplishes two important objectives: Ø It shows that you carried a monthly balance well below the credit limit of your credit card Ø It forces the credit card issuer to report to the credit agencies that you carried a monthly balance an that you Keeping old credit cards accounts active also increase your aggregate credit card limit, thereby reducing your overall credit usage versus your available credit limit. This ratio is a statistical boon to your FICO scores because responsible use of credit increases your credit scores. To receive a copy of this in .pdf format with charts and graphs, please email jzimmer@parlaymortgage.com to request your copy. *** Parlay Mortgage & Property, Inc. concentrates in providing comprehensive financial solutions by leveraging personally held real estate. We also provide consulting services for real estate investors from finding the perfect property, through the rehabbing, property management, and ultimate sale of the property. Whether you are looking to refinance, purchase, or obtain an equity line of credit, we have the mortgage program for you. If you are looking to become a real estate investor please ask about our one stop shop rehab and investing consulting services.
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