9 Ways to Improve your Credit!
#9 CLOSE OUT OLD ACCOUNTS
In some cases if you have TOO MUCH available credit on your credit report it can hurt your score and reduce the amount lenders are willing to loan you. This can happen to people who have long credit histories. Old, unused accounts are never closed but they do count as available credit nonetheless.
If your credit score is suffering from too much available credit it may be to your advantage to close out a few of those old accounts. However, if you do this you need to close these accounts early, well before you apply for a mortgage. Closing them too close to the time when you apply for a mortgage won’t help your credit score at all.
#8 MINIMIZE INQUIRIES ON YOUR CREDIT REPORT
Excessive inquiries on your credit report can hurt your credit score. Inquiries mean whenever you apply for credit from someplace the lender will check your credit report – that’s an inquiry. If too many lenders check your credit it can decrease your score.
The best way to reduce the number of inquiries is not to apply for loans or store credit cards. This is particularly important during the rental period of a rent-to-own. If you are trying to rebuild your credit so you can qualify for a mortgage you need to minimize these types of hits against your credit score.
#7 DO NOT TAKE ON NEW DEBT
Boy, I can’t emphasize this one enough. When you move into a new house how tempting is it to go out and buy new furniture or new appliances? It’s a new house right? You want new things to go into it.
This is like suicide for rent-to-owns. You are supposed to be improving your credit and not taking on new debts is critical! Not only that, but the payments on those new debts will also reduce the amount of mortgage you can qualify for. I talk about this in the book - even a monthly payment as little as $25 can reduce the amount of a mortgage you can qualify for by $4,000. Is that new couch really worth it if you can’t buy the house at the end of the option period?
New debts are a triple whammy against your credit:
- They result in an inquiry against your credit score
- Having more debts brings down your credit score
- Having monthly debt payments will reduce the amount of mortgage you can qualify for
That being said there is one case in which taking on new debt can help you - if you don’t have enough established credit to qualify for a mortgage. This only applies to people who are very new to building their credit. It is not intended for people who are trying to RE-BUILD their credit. Additionally the only way it helps is if that debt is PAID OFF at least 3 months before you apply for a mortgage. If it isn’t paid off long enough before you apply for a mortgage it won’t register on your credit report as paid off yet. These things can be slow to update so you need to give yourself plenty of time.
#6 HAVE ESTABLISHED ACCOUNTS IN GOOD STANDING
Nothing shows creditworthiness than already proving you are. If you have established accounts on your credit report make sure they stay in good standing. Don’t close out those good accounts (unless you have too many, as I said above). Pay those good accounts on time, too.
If you’ve proven that you are a trustworthy person with those accounts it will go a long way to help show that you will be trustworthy on a mortgage.
#5 HAVE DEBTS CLOSE TO THE CREDIT LIMIT? SPLIT BETWEEN 2 ACCOUNTS
This is one of those funny little tricks of good credit. If you have any credit card debts that are more than 75% (some people even say 50%) of the available credit, it’s better to split that debt between two credit cards (if you already have an extra credit card, I’m not suggesting you sign up for a new card just to do this). You aren’t reducing the total amount you owe in any way, you are just splitting it between two accounts, so you are reducing the ratio you owe compared to the total credit line. That ratio is actually important for your credit score.
Here is an example to clarify this. Let’s say you have one credit card with a $5,000 balance and your credit limit on that card is $6,000. That means you are using about 83% of your available credit on that card. If you have a second credit card without a balance, (to keep it simple we’ll say it has the same credit limit of $6,000), transfer $2,500 from the first card to the second. That way both credit cards have $2,500 on them. Like I said you aren’t reducing the amount you owe, but you are now only using about 42% of your available credit on each of those cards. Going from 83% debt on one card to 42% on two can actually help your credit score.
#4 STOP USING YOUR CREDIT CARDS!
Even if you weren’t trying to improve your credit I would suggest this one. Credit cards are just sickeningly easy to get in trouble with. I don’t know many people that have credit cards that haven’t gotten into trouble using them at some point in their life. Just keep this in mind – the more credit card debt you have the lower your credit score.
Just stop using the darned things. Not only do they lower your credit score when you have higher debt, but remember that when the monthly payment on your credit cards goes up the amount of mortgage you can qualify for goes down – by thousands of dollars!
#3 PAY OFF DEBTS
The fewer debts you have the better your credit score will be. Tighten your monthly budget some to increase the amount you have available to pay off some of your outstanding debts. It’s a good idea to talk with a mortgage broker about creating a plan for paying off debts.
Typically a good way to do this is to start by paying the smallest debt off first and then the next smallest and so on. I go into details for this technique in the book and it can be very effective at getting rid of some of those debts.
Remember, paying off debts not only increases your credit score but the fewer monthly payments you have the more mortgage you can qualify for. In chapter 3 ofRent-to-Buy I talk about front ratios and back ratios, and paying off some of your existing debts can help you meet your back ratio.
#2 PAY EVERYTHING ON TIME
This is the second-most important thing you can do when it comes to improving your credit score. If you want to qualify for a mortgage you absolutely MUST make all of your monthly payments on time! NO late payments. NO bounced checks. NO excuses!
Consistent, on time payments will really help your credit score. Not only that, but if you make even one late payment during your rental period you may not be able to qualify for a mortgage at the end. Lenders HATE to see late payments on your credit, so once you start an option period make sure that you make those payments on time. Remember if you can’t qualify for a mortgage your option fee is non-refundable. You don’t want to lose that money or the house.
#1 SIGN UP FOR CREDIT REPAIR SERVICE
When our credit reports have damaging items on them, sometimes the only way to get your credit score high enough to qualify for a mortgage is to get those damaging items off. This is where credit repair comes in. A REPUTABLE credit repair company can help you repair your credit and help you remove damaging items from your credit report. In fact, in cases where a buyer cannot qualify for a mortgage and wants to do rent-to-own, I almost always recommend they sign up with a credit repair company.
Comments (3)
Hi all I am new to this site and excited about being part such a great investing community and will be becoming a pro member very soon. This is my first post and I decided to because when I saw this wonderful article, it hit home. I am on this site for my own investing but my day job is CEO of an extremely ethical credit repair and student loan services company that continually gets the best results due to our pre-screening and knowledge of what works and what doesn't. The things I am most proud of about my company is that my teams knowledge and 35+ years of experience are 2nd to none (past FICO executive, SVP of BofA in international fraud and collections, etc), we have 100% client satisfaction anywhere you search for us, and we get an average of 80% deletion in 3-4 months in an industry that's average is 46-54% in 8-12 months.
So if you don't mind I will share some thoughts for each of these points.
#9 - Another way to explain this is closing any revolving accounts (credit cards) especially older mature ones is a bad idea because 15% of your entire FICO scores are based on the age of the account. Closing good mature accounts will never help scores it will only hurt them. If you have a credit card account and leave it inactive (usually a year or more) the creditor will close it due to inactivity to hedge their risk and tidy up their portfolio. If they aren't making money on a consumer through interest you are no value to them. FICO generally wants to see no more than 3-5 revolving accounts open with 7+ years maturity if you are working toward the ever elusive 800+ credit scores.
#8 - Inquires are a very small part of a credit score and are not going to impact you the way most think they will and I will give a few examples. If you are applying for credit responsibly (i.e mortgage, auto) FICO knows that you will be shopping for the best rates and doesn't penalize you for this. As long as you cluster your apps within a 30 day window it doesn't matter if you have 30 mortgage companies pull credit, FICO will only count it as one inquiry. Now what FICO does not want to see is a consumer who is highly leveraged on all of their credit cards, has taken out unsecured installment loans, late payments and is out applying for every type of financing out there to get access to more. This is an immediate red flag because that consumer is a huge default risk and is most likely living beyond their means and supplementing their income or lack or with loans and credit lines. Also inquiries only impact your credit for 12 months but will report for 24 months.
#7 - In the case of taking on new debt, there are valid points here. If you are working on a mortgage, your lender will have to add up all of them in relation to your income to come up with your debt to income ratio (DTI) and depending on these factors may limit the amount of loan you can be approved for. Like Wendy said it is absolutely not worth it. We work with thousands of home lenders all over the country and this is the one of the most heart breaking things we see all the time. The lender refers their client to us and we clean up their credit over a couple of months educating them along the way of the credit do's and dont's and right before they have their ducks in a row to get their home, they get excited with their high scores and go buy a new auto or open a credit card and rack it up. I can say that we personally experience 8-10 people per month that either are told they no longer qualify or they are already approved and in escrow and fall out because the lender can no longer approve them. If you have credit card debt and need to pay it off prior to a lender pulling your credit or just want to maximize scores, make sure to pay the bill 45 days prior to the lender pulling your report. The reason for this is because creditors only report to the bureaus once per month and depending on your cycle and when they report it can take up to 45 days to reflect the new balance. Credit card utilization (balance to limit ratio) is 1/3 of your entire FICO score.
#6 - This was covered in #9, but one thing I would like to add that is probably the most important fact with credit is that credit cards make the world go round. Even if you hate them, you should always have at least one for many reasons and keep it active using it at least twice per year so the creditor doesn't close it due to inactivity. A revolving account makes up 3 of the 5 parts of a FICO algorithm adding up to 80% of the entire score.
#5 - To further clarify this point, FICO isn't looking at each individual card to calculate cc utilization as explained in the article. They look at it in total. In an example lets say you have 3 credit cards each with $1000 limits, one is maxed out at $1000 and your other two are 0 balances. This is 33% total utilization as it would be if you had $300, $200, and $500 across the three cards. So to figure out your total utilization add up all your credit card limits and your total cc balances and divide (balance/limit=utilization). These thresh holds are good rules of thumb when paying down cc debt and positively impacting scores (under 50%, 30%, and then under 10%).
#4 - Just to reiterate, use credit responsibly, keep balances low, limit the amount of cards you have, keep them open and in good standing, and always always always pay at least double the minimum payment. With technology, creditors, FICO, etc can easily figure out how risky a consumer is to default and one of the biggest red flags is someone who carries a balance and just makes the min payment month in and month out.
#3 - Paying a small debt first gets you a "win" that feels good to keep going. Another factor to consider are interest rates and paying the highest first. While doing this if you are getting discouraged pay another small one for another exciting "win" that will keep you motivated to get out of revolving debt.
#2 - Paying on time is the biggest FICO factor at 35%. Being late on one payment can immediately drop your score 120 points. In the case of a mortgage late, many loan programs will not approve you if you have one in the last 12 months. Also remember that if you get a 30 day late it is really 60 days late because they aren't going to report it until you are 30 days past the original due date. So if you do miss a due date make sure you catch it and get it paid asap in the late grace period because this will save you lots of future heartache. If the reason is lack of funds, this is the time it is OK to make a min payment to avoid the late. JUST GET IT PAID HOWEVER YOU HAVE TO. No credit repair in the world can fix this issue for you and it will take years to heal from it. Another thing to consider is once it is late they start tacking on late fees, commonly raise your interest rates, and if it becomes a problem (more than one) other companies you have credit with will raise your interest rates because you are becoming high risk to them. They also commonly will reduce the amount of available credit you have or reduce it once you pay the card down to hedge risk. Back to the utilization point, this will cause your utilization to increase if you have balances and further hurt your scores.
#1 - HA I am not going to plug my company here but will just say that there are many out there that absolutely don't have your best interest in mind and only care to collect money from you regardless of if they can help or not. Their mantra is if someone calls them, has bad credit, and is willing to pay that is all they need. If they want you to pay upfront or promise deletions and results these are red flags to run as fast as you can quickly.
Wow I just scrolled up and saw my ridiculously long winded response which I like to refer to as being passionate about what we do. : ) I am new to real estate investing and look forward to meeting others who are as passionate about it as much as I am about credit and finance. If you ever have questions please feel free to ask me through this site (I will be making more of a habit of spending time on here) or am very quick to respond to emails [email protected]
If you have read this far, thank you, I truly enjoy helping others, and for reading it all here is a quick summary of the quickest path to 800 credit scores.
As a rule of thumb,
3-5 revolving accounts (credit cards) 7+ years open
At least 2 installment accounts (auto, home) 18+ months on time pay history.
Low revolving utilization (0-8%)
Not out applying for lots of new credit.
NO LATES
If you live by this simple rule no matter where your credit is when you start you will have 800 credit scores in 8 years.
Brent OConnell, over 7 years ago
On #9, I hear mixed reviews. Come credit advisers say if you have more than 11 accounts open, it looks good. I always pay my cards full balance, but I have a large credit availability. What is the ideal amount of credit sources and amount of credit availability?
Melissa Dorman, over 7 years ago
Great article! Thanks for sharing this!
#9. I heard closing accounts is actually bad for your credit. Why is having too much credit available a bad thing? How much is too much? I've have credit card companies close accounts on me after years of inactivity.
#8. Is there is certain time period, say 5 inquiries in 7 days, where it looks like it only took one hit? This is a catch 22. You want more credit or apply for loans as a responsible consumer, but then it can hurt your credit?!?
#7. Amen to not taking on anymore debt. But my husband has no debt, so he also has no credit. Dumb. What do you suggest for good, new debt?
#6. Yes, yes, yes!
#5. I didn't know that tip, but sounds reasonable. It still boggles my mind that you can "trick" the system with moving debt, even though you still have the same amount.
#4. Interesting. I use my credit card for it's purchasing protect (and points), and pay it off immediately.
#3. Yes, pay off bad debts.
#2. This is huge! Especially when landlords check your credit. They want to see that you pay all your bills (and rent) on time.
#1. What exactly does a credit repair company do?
Julie Marquez, over 7 years ago