I am far from a credit-scoring expert, but I have learned a few tricks over the years that have come in very handy for my clients from time to time. In the mortgage world, as you can imagine, credit is everything. Granted, someone with a credit rating below a certain threshold will still get approved for a mortgage, but it can surely be costlier because of that lower score. But knowing your “mortgage score” versus your “consumer score” is not always as simple as it seems. In fact, anyone with a credit card or outstanding loan is most likely being targeted for credit monitoring services or other types of credit services to help them maximize their credit rating. However, many of these subscriptions are “ok” at best, but most are watered-down versions of the real thing.
I have written about the credit reporting and scoring topic in the past, but a recent call from someone I spoke with over a year ago helped remind me how vital and confusing this subject can truly be. My caller was proud to tell me that many of the suggestions that I told him about last December have finally been able to boost his credit rating considerably. The improvements that he was able to make will save him at least $200 per month if he moves forward with the house he is contemplating. It might be even more of a savings if he chooses to put down less than 20% and requires mortgage insurance.
I was thrilled that the recommendations I made had such an impact in a relatively short period. There are certainly credit agencies that specialize in credit repair and guidance, and they should be utilized in extreme circumstances. There are however many quick-fixes and do-it-yourself tips to help increase your credit score without any added expense. I thought I would discuss a few easy but valuable ones.
Maintain Credit Usage
There are still many who are of the misconception that using credit cards are harmful. Even worse, there are those who again wrongly subscribe to the philosophy that you should close accounts that are not being used. In fact, if an account does become inactive for an extended period, creditors might proactively close it. This is harmful for credit scoring because it will negatively impact your average age of credit and available credit. The advice here is to make sure you use all available credit accounts – even the small gas-station cards and the department-store cards a few times per year, just to keep them active.
Establishing New Credit
It’s true, obtaining new credit can decrease your score. The reason is that when you open a new credit account you are making the total average age of your credit lower. This will have a negative impact on your established credit history. The older your credit tradelines and history, the better it is for your score. The effect is not merely because there was a new “hard inquiry” on your profile, because that in of itself will also cause the credit to drop. Before opening any new credit, take into consideration the timing of any pending home or auto purchases, or possible refinancing, which might be have an impact as a result.
Manage Balances Diligently
It goes without saying that you should stay current on all your credit accounts. Whenever possible pay your credit cards down to 7 to 10% of the limit, and try to keep a balance on fewer credit cards. The closer the aggregate and individual account balances are to your limits, the more the score drops. Try not to co-sign for any credit unless you are in control of making the payments and monitoring balances.
As I tell all my clients, no credit situation is hopeless because credit should improve as time goes by, assuming the person is not late with any new tradelines. When there is a derogatory account, “disputing” it is not always the answer, so speak to a mortgage or credit expert before you go that route. With the guidance of a professional you can benefit significantly in interest rate impairments – which can translate into thousands of dollars over the life of your loan.
Special shout out and happy birthday to Mark Kirschenbaum.
By Shmuel Shayowitz
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience including licenses and certifications as certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected]