A credit score is becoming one of the most important factors when it comes to borrowing money, purchasing a house, or even getting hired by an employer. All anyone needs to check your score is your social security number and your written approval.
Miss a payment on your credit card or default on a loan, and your score will potentially crumble. If your score is lower than you would like it to be, then you have some work cut out for you. Everyone is looking for the fastest way to get their score higher. When getting ready to buy a home increasing your credit score prior to applying for a loan can save you a substantial amount of money on your monthly mortgage payments.
There are 3 major credit bureaus, and they all have different criteria that go in to determine your overall scores. And sometimes a derogatory mark isn’t reflected on all of the credit bureaus. If you have ever applied for a loan on a vehicle or a home, you may know that many times the lender will throw out the lowest scores.
So what can we do to increase a credit score to get the best interest rate on our home mortgage loan today? It’s far easier to keep a good score than it is to bring a poor one up.
But first, let’s talk about the difference between a credit score and a Fico score and if we can use there terms interchangeably
FICO Score vs Credit Score
- A FICO score was coined by the Fair Isaac Company and consists of 3 digits. The score that you’re assigned measures your credit risk. The higher the score the better.
- A credit score also consists of 3 numbers and is derived from a proprietary model. Each of the major bureaus has its own model. Usually, the max score is 850. You won’t need 850 to get the best rate. You just need a credit score that is good enough! Typically, the minimum credit score you need to have to get a mortgage is around 650. Although, your interest rates will be much higher the lower your credit score is.
- So no, a credit score and FICO are two different systems, but both are based upon your credit history.
Avoid High Credit Card Balances
When you apply for a credit card the bank will usually issue you a maximum credit limit. For many individuals, the credit limit might be $2k or it could be even higher. If you max out your credit cards, then you can no longer make purchases, and this will negatively affect your credit score.
- If you carry a high credit card balance, start making larger payments every month. The difference between the current balance on your credit card and the maximum amount you can charge is known as, available credit. The higher the better.
- As you make payments towards your credit card each month, the available credit will increase. This is your first step to a higher credit score.
Ask for a Higher Credit Limits
Sometimes you can increase the amount of credit that you can charge on your account. What this does is increase the available credit that you have. But don’t go out and make new purchases. Your credit card company just did you a big favor, and by increasing your available limit, this should also increase your score
Don’t Close Credit Card Accounts
Many consumers falsely believe that if they close credit card accounts they no longer use, or that have been paid off, it will ultimately help them. All they did was hurt their score.
When you cancel an account, this subtracts the overall available credit limits.
- If you have two credit cards that both have 5K available balances
- That means you have 10k in total available credit
- When you cancel one of the cards, your maximum available credit is now just 5k
Contrary to popular belief another way to increase your score is to apply for more credit cards. Lenders want you to apply so they can charge you 18% interest rates. But you just want to add to your available credit limits. Don’t’ charge anything on these new cards, just put them in a drawer and forget about them. This guy has 20 credit cards and has a FICO score in the 700’s.
No Action is Needed
Many consumers don’t know that all derogatory marks will eventually fall off your credit report. Everything on your report that is holding your score down will disappear, eventually.
The downside is that it may take 7-10 years for this to occur. Yes, even bankruptcies, foreclosures, and credit card charge-offs will disappear eventually.
Remember though, you still will owe the parties any money, even if it doesn’t show on your credit report.
When negative items fall off your report, your score should go up.
Contact the Collection Agencies
So you decided to address some derogatory items and want to pay them off. Maybe you didn’t pay your phone bill or you broke your apartment lease. If the account is being held by a collections agency, you will want to contact them by phone.
They bought your debt for pennies on the dollar and you can assume that they will accept much less than what you originally owed.
- Just make sure that they will remove the account from your credit report. Get this in writing before you pay them!
- ? Did you know that over time, negative items on your report won’t impact your score as harshly as it once did.
- If you have been making on-time monthly payments for your phone bill and credit card accounts, this can offset any bad credit history.
Address the Items on Your Credit Report that Really Matter
If we knew the largest components that make up a credit score, we could spend our time addressing those and not worry about the rest.
Well look no further, according to this author, these pieces comprise the largest part of a FICO score. We suggest you target these items initially.
Your payment history is going to account for 35% of your credit score. If you make on-time payments on all of your loans and credit cards, this will have a huge weight in your credit score. And this makes sense. New creditors want you to repay your loans on time
Amount You Owe
As discussed earlier, it’s the amount of money you currently owe, compared to your total credit limit that matters. This makes up 30% of your credit score.
If you have an American Express card with a balance of $1500 and a limit of $5000; and another card with a balance of $500 and a limit of $3000; we can start calculating percentages.
Your total credit card balance is $2000, and your total available credit is $8000.
We then divide 2000/8000 and come up with .25. You would, in fact, be using 25% of your total utilization capacity.
The lower the better, but you don’t want it to be too low. The author above recommends a minimum of 10%.
Utilizing the two largest factors, this comprises 65% of your total credit score.
The only reason you need a high credit score is when you need to secure a loan. This helps you qualify for the lowest credit card rates and lowest interest rates on mortgage loans.
- Make your payment on-time. This is one of the biggest factors in your overall credit score
- Don’t max out your credit cards. This will negatively impact your scores. Pay off as much of your credit card as possible by paying more than just the minimum monthly payment.
- Derogatory marks on your credit report will eventually disappear. Also, negative marks do not impact your score as greatly as they age.
Additional real estate resources
Learn how to get your credit score up quickly when you’re on the hunt for a new home. By David Martin
Karen Highland has some excellent information about understanding your credit score.
Eric Jeanette shows how people with bad credit scores can still get an FHA loan for a new home.
Petra Norris has written and informative article about the new credit score ranking called FICO Score 10 model.
Glenn Shelhamer talks about the type of credit score that is needed to purchase a home.