"How can I improve my credit score now?"

Each of the credit repositories has a credit scoring system that evaluates your credit situation.  There are ways to improve your score, but in order to improve your score you must know how the scoring systems work.   There are three different scoring systems.  Fair Isaac is the most frequently mentioned scoring system when it comes to lender speak out in the industry.  Don’t be surprised if someone asks you what your FICO score is.  FICO is short for Fair Isaac and Company.  This company is just the name of the company the Experian (Formally TRW) hired to come up with a way to evaluate a person’s credit.  They basically took thousands of files, picked them apart, and looked for patterns in the history of a credit file.  Once they filtered out these patterns they then were able to predict which files were more likely to be riskier than others.  For example, if it showed on a credit file a 30-day late and a 60-day late.  Fair Isaac would predict that the likelihood of a 90 late would follow.   In a way it is funny that they spent all this money to create a credit fortuneteller.

Here is basically how it works.

35% of the score goes toward late payments and derogatory credit.  What the frequency is, how recent they are and how sever they are.
30% of the score goes towards your credit balances.  How much available credit you have, how many trade lines etc.
15% of the score goes towards credit history
10% of the score goes towards type of credit
10% of the score goes towards inquiries.
Now with this knowledge how can we fix your score to reflect a higher FICO?
Lets start with the derogatory credit?  If you have lates or collections what can you do?

Payment History Tips

  • Pay your bills on time.
    Delinquent payments and collections can have a major negative impact on your score.
  • If you have missed payments, get current and stay current.
    The longer you pay your bills on time, the better your score. You need at least 12 months current credit for it to really help.
  • Be aware that paying off a collection account will not remove it from your credit report.
    It will stay on your report for seven years from the date of last activity.  Last activity means last payment.  Many people are under the assumption that if you call the creditor it automatically counts as an activity. This is not the case - now if you pay them $1.00, then it would be. Here's a tip.  If you are looking to get a loan and have charge offs and collections, if the collections are over 2-3 years old DO NOT PAY THEM YET if you are planning to apply for a loan. What will happen is that they will immediately lower your score. The reason for this is that it will show up as a currently paid collection account and push you into that "recent derogatory" evaluation.

(Now Fair Isaac understands this is a problem and is currently working to resolve it, but to be on the safe side for now, make it a condition at the close of the loan; most lenders will agree to this as long as the collections are under $5000.  Now here is something interesting.  If you have a charge off, go ahead and pay it.  This could immediately increase your score.  The reason for this is because charge offs are viewed as credit lines in the system, which should automatically give you a higher credit limit, which adjusts the score.  Yeah I know, it seems stupid and it is, but for now this is what we have to work with.)

  • If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
    This won't improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.
Credit balances are 30% of your score. You should have between 3-5 revolving lines of credit that are open and available.  Some people think that by closing their credit account they are actually improving their credit situation.  This could not be further from the truth.  If you wish to pay off your account, you can do so, but remember keep the account open.   Fair Isaac looks at the amount of credit limit you have available. 

For example:  Lets say you have 5 different credit cards with balances of $5000 apiece.  But you only use one that is maxed out.   Fair Isaac looks at this as if you have $20,000 available credit to you in the event of an emergency so your score will reflect higher. By the same token, if you decided you were not going to ever use these cards again, and closed all but the one down.  Fair Isaac looks at this as if you have no available credit in the event of an emergency so it will reduce your score and consider you a high risk because it thinks you max out your credit cards each month.

The easiest way to improve your score is to have the amount of your debts be only half of what your total available credit is. Fair Isaac breaks this down into 3 different levels.   The optimum is if you have 50% or more of your available credit to debt. The mid optimal is if you have 25% or more available credit to what you owe in debts. The least optimal is having your credit completely maxed.

Also remember not to run out and apply for more credit cards so that you can get a higher credit line. This will reduce your score because remember Fair Isaac looks at this as a recent card and a recent inquiry. A recent credit inquiry means that you cannot afford what you have and are seeking to acquire new debt. Unless you are planning to wait 12 months for it to season don’t do it.

Revolving lines of credit are actually better than installment debts.  The reason for this is that installment debts usually are for the amount borrowed or above.  For example, some larger department stores that advertise 0% interest for 12 months and no payments for 12 months are the ones to be the most leery of. What most people do not realize is that the instant that you get these accounts they immediately hit your report. And they hit it for higher than what you borrowed because if you read the fine print, these cards back charge you if you do not pay it off within the time period allotted - they back charge you interest for all those months. So whatever you do, if you are trying to buy a home, wait until your home closes before you make any major purchases. Yes this means no new cars until after you close escrow on a home. Don’t laugh, people do this all the time without realizing what is happening and end up losing the home they are in escrow with.

Credit history is taken into account for 15% of your score
Basically this means the longer you have held credit the longer you have had to learn how to manage it. A long credit history is considered 30 years.

If you have a history of having bad credit, Fair Isaac will predict that this will be a trend for you and lower your score.  On the other hand if you have a hiccup in your credit history that only lasted a year and it happened sever years ago, it will not see the pattern and rate you differently.  Now if you have current lates, Fair Isaac will assume you are having difficulty and rate you lower because it thinks you are a higher risk.  This is why it is os very important that you keep everything current.

10% deals with the type of credit you have. If you have 10 credit cards it views you differently as if you had 10 installment loans.  By having different credit on your report, it tells Fair Isaac the type of consumer you are.  For example if you only have a mortgage and a car, this tells Fair Isaac that you are a lower credit user and therefore are a better risk.  On the same token if you have a mortgage a car several student loans several credit cards and a second on your home, it tells Fair Isaac that you are a credit abuser and are using too much credit.  The average consumer has between 3-5 trade lines of credit.  Having too much credit is not necessarily a good thing.  If you feel that you are in this category and have more than 7 lines of credit, then the best thing to do is to close out your lowest credit limit accounts.  For example if you have a Sears account for $700 with a 700 limit and a Levitz card with a $2000 limit, and you never use either of them, close out the Sears account and leave the Levitz. It does not hurt you to keep an account active on your report.

The last and most misunderstood of the reporting system is the credit inquiries.  Despite what everyone tells you, inquiries on your credit report only count for 10% of your credit score. You can have up to ten inquiries within a 7-day period of time for an auto loan.  You can have up to 10 or more inquiries on a home loan within a 30-day period and if you keep running credit every 14 days for a home you could technically extend this for a while. Fair Isaac realized right aware that consumers are going to shop around.  It is only fair that the inquiry that affects your score is only the first one that was ran.

What lowers your score with inquiries is having a variety of different types of creditors run your credit.

The best part about the Fair Isaac system is that it has no memory.  It only evaluates you based on the information it has at the moment of time your credit is pulled.  So if you can get deletion letters for these collection accounts, it forgets they were there the instant it gets deleted.  Also for bankruptcy files, make sure that all your accounts that were included in the bankruptcy are remarked on your credit report “Included in bankruptcy”, other wise it will be viewed as additional bad credit after a bankruptcy.

You are allowed to remark on your credit report if you are in dispute or if the account is having payments made, etc. 

Tips & Tricks for Home buyers

If you need your score up quickly, here are a couple of things to keep in mind. First work with your lender, there are automated systems the credit agencies have called the “What if” simulators. These simulators will help guide the lender to help you fix your score through what is known as a “Rapid Re-score” It may cost a little extra but it is worth it. The other things you can do is ask for family help. If you have someone you know who has a credit card with a high limit and a low (30%-40%) balance that has been established for a few years, then you can ask them to attach you to their account as an authorized user. This not only helps you build credit, but increases your score as soon as it is reported to the credit agencies.

Capitol One credit cards are the go to cards for when you are ready to apply, now you have two things happening when you are approved a card. It marks your score down, but if you place 35% on the card as soon as you get it and make one payment back down to 30% within a month your score should go back up.

Any collections that have been sold to other collection, talk with your lender. For example if you have a judgement filed against you by a collection agency then typically your score will go up if this is paid. This does not place it in the 12 month review, it simply releases a judgement which in turn should increase your score.

DONT just pay off collection accounts when in the process of buying a home, as this can reduce your score and place you at risk for loosing a loan you might have otherwise qualified for.

If you credit is too far gone, and you are a first time homebuyer with no ownership interests in a home for over the last three years,
NACA has a program that you may qualify under regardless of credit with no income limits. NACA (Neighborhood Assistance Corporation of America) is the worlds largest advocacy group not only for people wanting to buy homes, but for people who want to save their homes.