Two Things You Can Do To Help Improve Your Credit Scores
By Doug Goelz, Mortgage Services
Credit scores are key to whether you can get a mortgage under the terms you want. Anyone with a credit history usually has 3 different credit scores: one each from Transunion, Equifax, and Experian. Lenders usually look at the middle of the 3 scores. While lenders will offer loans up to $636,150 to borrowers with 20% down and credit scores in the low 600s, the rate generally will be at least .5% higher than if the middle credit score is at least 700. If you want to borrow more than $636,150 and/or put less than 20% down (except with FHA and VA loans), you probably will need a middle credit score of at least 700.
A credit score is a snapshot in time based on credit behavior up until the credit report is obtained. However, credit reporting agencies often don’t have the latest information, so recent credit activities (such as payment just made) may not show on your credit report until weeks after they occur. Because of the timing issue with credit reports, it is important for all potential borrowers to be aware of their credit scores and to take steps well in advance of applying for a loan to make any improvements possible and needed on the credit report.
Here are a two steps a borrower can take to improve credit scores. Ideally, you want to take these steps at last a month before a lender obtains your credit report. If necessary, if these steps are taken AFTER a credit report is obtained, scores can be recalculated if the borrower provides documentation from the creditor that the steps have been take. However, recalculating credit scores can take several days and cost as much as several hundred dollars (depending on how much information has to be updated).
Keep The Percentage Used of Your Credit Limits on Credit Cards as Low As Possible – Factors taken into account in calculating you credit scores include not only how much you owe, but how much you owe as a percentage of your credit available. Someone who owes $3000 on a credit card with a $4000 credit limit will have a lower score than someone owing $3000 on a credit card with a $10,000 limit. If your credit card balance is over 40% of the credit limit, you can improve your score by paying it down to under 40% of the credit limit.
Similarly, if you owe $3000 on one credit card with a $4000 limit, and $0 on a another card with a $5000 limit, your scores should be better if you owed $1500 on your card with the $4000 limit, and $1500 on the other credit card with a $5000 limit. In these two examples, you have the same amount of debt and same amount of credit available, but your credit scores are better if the debt is spread over the two cards rather than being owed on a single card. No matter how many credit cards you have, the key to better scores is to keep the percentage used of the credit limit on all your credit cards as low as possible.
Negotiate Your Late Payments and Collections – Late payments in the last 12 months and collection items can bring credit scores way down. With a late payment, if you feel there were mitigating circumstances (such as a business trip or a change in your banking arrangement), and there is no regular pattern of late payments, you can call the creditor and ask them to not report the late payment to the credit bureaus. If they agree, also ask for something in writing stating they are removing the “late” from your credit report. It could take weeks for the creditor to get around to removing the “late” with the credit bureaus, and you may want documentation of their actions sooner.
With a collection item, you also can call the collection agency and ask them not to report the collection item. The only incentive a collection agency has to remove a collection item if it has been paid, so be ready to negotiate payment of the collection in exchange for it not being reported. If the collection agency agrees to remove the item, be sure to ask for something in writing as well stating they are removing the collection item from your credit report. Note that removing the item is different from showing the item as paid; you want it removed so that it does not appear on subsequent credit reports.
Remember that with creditors who received late payments and collection agencies, unless you can prove that the information they have is incorrect (that is, the payment wasn’t late or your bill was paid as agreed), it is at their sole discretion whether to stop reporting a late payment or collection item. Also, your chances of having items removed are probably better if you ask to have them removed shortly after they start appearing on your credit report.
If you are not sure you have excellent credit, and you are thinking of obtaining a new mortgage soon, you may want to start using a service that reports your credit scores to you. That way, if there are derogatory items that are hurting your credit scores, you can be aware of them as soon as they appear and take steps to correct them if you can.
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