Improving Your Credit Score

Many people with stable finances, a good job, and money in the bank, who want to purchase a home are finding a roadblock to mortgage approval: a credit score too low to qualify for a loan with today’s credit requirements.

For people in this situation, it’s important to remember that this isn’t the end of the road; it’s merely a delay in achieving your goal. Credit scores can be improved. With some basic knowledge of how credit scoring works, you can take steps to improve your score and meet many of your financial goals.

What Is a Credit Score?

A credit score is a number between 300 and 850 that lenders use to determine whether to extend you credit, the amount of credit you qualify for, and even the terms (interest rate, loan amount, repayment schedule). Generally, scores over 700 are considered excellent while scores below 600 are considered poor.

The score is determined by the three leading credit bureaus: TransUnion, Equifax and Experian. Your creditors — the companies, lenders, and organizations that lend you money and extend credit to you — report information to them such as your credit limit and whether you pay on time. Each agency keeps its own records so your score can vary from bureau to bureau. For a mortgage loan, generally the middle score is used.

Why Is It Important? 

Beyond securing a home mortgage loan and purchasing a home, credit scores are often used in determining prices for auto and homeowners insurance. Employers have also begun using the scores as part of background checks when making hiring decisions. The practice of using credit scores in nontraditional ways is expanding. It’s more important than ever to educate yourself about credit.

What Influences Your Credit Score?

• Do you pay your bills on time?
  If you have late payments, had an account sent to a collection agency, or have declared bankruptcy, this will have a negative impact on your credit score.
• What is your outstanding debt?
  The three leading credit bureaus, TransUnion, Equifax and Experian, look at how close you are to your credit limit (i.e., are you “maxing out” your credit cards). If the amount you owe is close to your limit, it is likely to have a negative impact.
• How long is your credit history?
  In other words, how long have you had credit accounts open? A short history can have a negative impact, but it can be offset by on-time payments and low balances.
• Have you applied for new credit recently?
  Applying for too many accounts within a short time period can negatively affect your score.
• How many and what types of credit accounts do you have?
  The credit bureaus consider the number and type of accounts you have. A mix of installment loans — such as an auto loan — and credit cards may improve your score. Too many finance company accounts or too many credit cards could possibly hurt your score.

Improving Your Credit Score

Although there are no quick fixes when it comes to improving your credit score, you can improve it over time. Here are nine steps you can take to become more creditworthy:

1. Create a budget and stick to it.
2. Continue paying your bills on time — your payment history matters.
3. Pay down high balances.
4. Settle any collections or past due accounts.
5. Don’t cancel your credit cards since length of credit helps. A paid-off, open line of credit can actually boost your score. In fact, canceling it may cause your score to drop.
6. Don’t apply for new credit.
7. Dispute inaccurate items in your credit report.
8. Keep “good debt” on your report, such as an auto loan with a good payment history.
9. Pay your parking tickets, library fines, and any other fines you may incur. If they’re sent to collections, it can negatively impact your score.

Protect Yourself from Credit Repair Scams

If you’ve had some trouble with your credit, you’ve probably received letters and emails from companies that promise to “fix” your credit for you, and quickly. But don’t be fooled. If it sounds too good to be true, it likely is.

It’s important to understand that there is no quick fix to improving your credit. It legitimately takes time and effort.

Signs It Might Be a Scam:

• The company wants you to pay for services before they are provided to you. Under the Credit Repair Organization Act, companies cannot request payment until they have completed the services as promised.
• The company recommends that you do not contact any of the three major national credit reporting companies directly.
• The company tells you they can remove most or all of the negative information on your credit report, even if the information is accurate.
• The company suggests you try to invent a “new” credit identity by applying for an Employer Identification Number rather than using your social security number.
• The company advises you to dispute all the information on your credit report, regardless of its accuracy.

Through our versatile home loan options, Choice can help you capture the pride of a new home. Our team of experienced home lenders specializes in everything from pre-qualification to your final payment. We’re here for you every step of the way.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.