Maybe you’re looking to buy this year, and a local homeowner has recommended a fantastic mortgage company in the area.
Perhaps you’re already pre-approved, and hoping to close with a lower interest rate by nudging your credit scores up.
Or maybe you’d like to refinance and take advantage of a great chance to lower your mortgage rate.
A few questions arise at these times, and one involves credit. Raising a credit score can win you a loan with attractive rates and terms.
So, you need to know the best steps you can take to boost your score and not inadvertently lower it. A local mortgage specialist can be an excellent adviser on whether you should, say, apply for new credit — or, instead, pay off credit card balances or outstanding installment loans.
Ask, and you’ll find out.
The Core Five-Point Plan
Here’s a five-point plan everyone can revisit from time to time, but dedicated to you who are hoping to get a loan with the best possible terms this year. We’ll add some information on emergency fixes… and how to know when they’re too good to be true (or legal).
Point 1. Know Your Credit Score.
Equifax®, Experian™ and TransUnion® a credit reports are offered free once a year, or when you have been a target of fraud. What score do you want to see? A “good” score is 670 to 739. Most loan applicants occupy that range. For better loan options, you’ll want a “very good” score: in the 740 to 799 range. Anything above 799 is “exceptional” — denoting the rare applicant who can essentially call the shots when it comes to mortgage loans.
If you have a high credit score, the message is you pay your bills on time, and you’re more of a saver than a spender.
Low credit scores don’t always mean the opposite. Maybe you opened your accounts relatively recently, or don’t have a lot of diversity in terms of types of accounts. Maybe you spend in spurts. These issues are relatively simple to tweak. In Point 2, we’ll explain how.
Point 2. Curate Your Credit Profile.
Your credit score is built by the everyday decisions you make as you use money. The key score influencers are:
- Your payment habits. To keep your score up, you at least hit the minimum payments due monthly on all loans and all cards. If possible, you’re paying off your whole account balances monthly. Credit reporting companies receive that information every cycle, and your credit score moves accordingly.
- Your credit utilization ratio. Nudge your score up by keeping a lid on your utilization rate. Your balances should be under 30 percent of your credit limits — and as low as possible if you want to optimize your credit profile. Because a high overall credit limit is important, avoid closing accounts even if you rarely use them.
- The time you’ve held your accounts. The longer you’ve had a good relationship with a credit company, the stronger your profile.
- Diversification within your accounts. Having a variety of credit types — a mortgage, an installment loan, several major credit cards — strengthens your position when you apply for financing.
So, to curate your credit profile, you need to actively use credit, pay on time, keep low balances and high credit limits, and nurture long-term relationships with the companies extending you credit.
Point 3. Check for Errors.
It might seem like a needless bother to look for errors in your data. After all, financial companies are supposed to keep that straight for you. But here’s the funny thing. Errors do occur in our credit profiles, and these usually don’t help us. And there’s no penalty for disputing credit report information, as your credit report will not change unless there is, in fact, an error to correct.
Common errors activity from someone else’s account (such as a family member’s), actions the account holder didn’t take on the account, or outdated information.
When you get your annual report, look for and dispute errors. The companies have to investigate and reply. And they must correct your credit profile.
Point 4. Put Your Payments on Autopilot.
Simple, but effective. Your credit score rises if you reduce the amount you owe on your credit cards and always pay on time. Enabling automatic payments in your account settings online can help make it happen.
Checking your statements regularly is still a good idea. If all your auto-pay withdrawals come from a single core bank account, you can easily check the movement of money.
Also, it’s far better to pay off the monthly balance than only pay the minimum amount. If the site only enables auto-payment for the minimum amounts, you might be paying more in interest than you need to.
Point 5. Close, But No Cigar? Hang On!
For credit scores on the borderline — such as a score of 739, which can be nudged from the “good” to the “very good” category — lenders may suggest rapid rescoring. As described by the credit company Experian, this action can help when the applicant’s credit score is a few points shy of the score that qualifies for the sought-after terms or interest rate.
The lender must initiate the action, by sending evidence to a credit reporting company of new, positive credit activity. For a fee, the company will then expedite rescoring. It might be a worthwhile investment to get a better interest rate. Your mortgage specialist can let you know.
For Urgent Repair Needs, Should You Call A Credit Counselor?
Credit counseling companies advertise themselves as the solution for debt problems. This could involve coming up with savings strategies or advocating for a client in order to obtain easier payback terms.
The Credit Repair Organization Act compels honest dealings from credit repair firms. These companies must, under the law, explain the credit repair timeline, and they must also tell you have three days to cancel your account with them at no charge. It’s important to seek a vetted and approved credit counselor.
But credit repair scams, according to the FTC, are all too common. Signs of bad actors are:
- Demanding upfront payment or failing to state the total cost of the service.
- Failing to provide a written agreement describing the service, guarantees, and consumer rights.
- Instructing customers to have no contact with credit reporting companies.
- Coaching customers to falsely dispute details in a credit report.
- Touting a new credit identity for the customer — which may mean identity theft. Steer clear of services that purport to erase a bankruptcy or collections history.
It’s against to law to give a lender false information, use a substitute for an original Social Security number, or apply for government identification numbers to cover up debt. If you suspect credit repair fraud, report it to your state authorities.
There are alternatives. Debt settlements and debt consolidation loans offer other paths to getting on top of debt, but also need to be carefully researched first. FHA mortgages have more forgiving credit score requirements, and the FHA can refer you to federally approved counselors to prepare you for the loan application process.
Conclusion: If Possible, Do It Yourself
Credit repair specialists can help you get errors fixed, but they cannot work magic. With persistence, you can take the necessary steps to spend a little less, save a little more, and remove detrimental history from your credit profile.
If your credit profile has negative items — for example, if it flags charges that went into the bill collection process — it will take seven years for them to roll off your report. The older the issue, the lesser its impact, but there’s no “quick fix” for credit. As Experian says, even lesser repairs take several months.
Speaking with a financial adviser or local mortgage expert can help you plan the moves to make (and not to make) to achieve your loan approval and reach your goal. Meanwhile, tune up your score with the five-point plan outlined above.
Consumer Financial Protection Bureau (CFPB): How Can I Tell a Credit Repair Scam From a Reputable Credit Counselor? (Jun. 8, 2017).
Photo credit: Marek Piwnicki, via Unsplash.