Island Home Loans Blog

YOUR CREDIT SCORE

If you’re dragging around bad credit scores, you’ll pay more for car loans, credit cards and especially mortgages.

Maybe your credit is OK, but you’d like to make it better. After all, the better your credit is, the lower the interest rates you can get on car loans and credit cards. And these days, having high credit scores is the one sure path to homeownership.

The first thing to do is to know what’s in your credit report.

Get a free copy from www.annualcreditreport.com. This site allows you to request a free credit report once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.

Here are some tips to repair your credit and boost your score:

1) Pay down your credit cards. Paying off your installment loans (mortgage, auto, student, etc.) can help your scores, but typically not as dramatically as paying down — or paying off — revolving accounts such as credit cards.

Lenders like to see a big gap between the amount of credit you’re using and your available credit limits. Getting your balances below 30% of the credit limit on each card can really help.

While most debt gurus recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.

2) Use your cards lightly. Racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month.

What’s typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements. (That doesn’t mean paying off your balances each month isn’t financially smart — it is — just that the credit scores don’t care.)

You typically can increase your scores by limiting your charges to 30% or less of a card’s limit.

3) Check your limits. Your scores might be artificially depressed if your lender is showing a lower limit than you’ve actually got. Most credit-card issuers will quickly update this information if you ask.

4) Dust off an old card. The older your credit history, the better. But if you stop using your oldest cards, the issuers may stop updating those accounts at the credit bureaus. The accounts will still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts. A good strategy is to use the oldest cards every few months to charge a small amount, paying it off in full when the statement arrives.

5) Get some goodwill. If you’ve been a good customer, a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing, and your chances for a “goodwill adjustment” improve the better your record with the company (and the better your credit in general). But it can’t hurt to ask.

6) Dispute old negatives. Say that fight with your phone company over an unfair bill a few years ago resulted in a collections account. You can continue protesting that the charge was unjust, or you can try disputing the account with the credit bureaus as “not mine.” The older and smaller a collection account, the more likely the collection agency won’t bother to verify it when the credit bureau investigates your dispute.

7) Fix significant errors. Your credit scores are calculated based on the information in your credit reports, so certain errors can really cost you. But not everything that’s reported in your files matters to your scores.

Here’s the stuff that’s usually worth the effort of correcting with the bureaus:

Late payments, charge-offs, collections or other negative items that aren’t yours.

Credit limits reported as lower than they actually are.

Accounts listed as “settled,” “paid derogatory,” “paid charge-off” or anything other than “current” or “paid as agreed” if you paid on time and in full.

Accounts that are still listed as unpaid that was included in a bankruptcy.

Negative items older than seven years (10 in the case of bankruptcy)

that should have automatically fallen off your reports.

Other credit mistakes:

Making a late payment. The irony here is that a late or missed payment will hurt good scores more than bad ones, dropping 700-plus scores by 100 points or more. If you’ve already got a string of negative items on your credit reports, one more won’t have a big impact, but it’s still something you want to avoid if you’re trying to improve your scores.

Consolidating your accounts. Applying for a new account can ding your scores. So, too, can transferring balances from a high-limit card to a lower-limit one or concentrating all or most of your credit-card balances onto a single card. In general, it’s better to have smaller balances on a few cards than a big balance on one.

Applying for new credit if you already have plenty. On the other hand, applying for and getting an installment loan can help your scores if you don’t have any installment accounts or you’re trying to recover from a credit disaster like bankruptcy.

By the way, all these suggestions work best if you have poor or mediocre scores to begin with. Once you’ve hit the 700 mark, any tweaking you do will tend to have less of a positive impact.

And if your scores are in the “excellent” category, 760 or above, you’ll probably be able to eke out only a few extra points despite your best efforts. There’s really no point, anyway, since you’re already qualified for the best rates and terms

Too many credit inquiries.

Not all inquiries that appear on your credit report affect your credit score. Inquiries that are made because of an application you made for credit are the ones that affect your score. These voluntary, or “hard”, inquiries are the only credit inquiries that count towards your credit score. Inquiries on your credit report can indicate your risk as a borrower. Too many inquiries might mean that you’re taking on too much debt or that you’re in some kind of financial trouble and are looking for credit to help you out. Several inquiries can reduce your credit score.