A Guide to Higher Credit Scores

By Steven Coombs

Credit Scores have become the underlining floor of the underwriting business. A strong knowledge of how those scores are calculated and an active role by you and your mortgage broker will save you thousands of dollars. I can not over emphasize the importance of enhancing your scores in the year, preceding a large purchase or refinance. It is simply never too early to go to work on improving your credit scores.

Let’s start with a breakdown of the calculation of your actual score: payment history – 35%, outstanding balances – 30%, credit history (length the account has been opened) – 15%, type of credit – 10%, and inquiries – 10%. If you are going to make changes or corrections to your credit report through an inquiry it will be helpful that said work is completed six months prior to your purchase or refinance. However I have recently been able to raise a client’s score 100 points in the matter of two weeks and immediately use said credit score. Obviously, erroneous information can be eliminated quickly. Dealing with actual past mistakes you have made needs time to obtain complete healing of your scores.
Stay with me here! If I begin to put you to sleep that’s understandable but dunk your head in ice water and read on because again this is big savings for you.

Payment History: It is logical that the actual payment history has the most impact. The model for credit scoring evaluates the severity of late payments, frequency of late payments, and the most recent late payments. Late payments on revolving credit effect the credit score more than installment late payments. However, mortgage payments are the most crucial. Simply stated “never be late on your 1st or 2nd mortgage.” If you are sitting at your desk near the end of a month and you absolutely must skip a payments somewhere don’t put your head in the sand. Pay the house payment, pay the master card payment, and skip the car payment. Sometimes reality bites. Late payments within the zero to six months most affect the credit score, with late payments within the 7-23 months having moderate effect on credit scores. Late payments over 24 months old represent a minor impact on the credit score. Thus you can see with recent diligence in your payments your scores can improve.

Outstanding Balances: Try to keep all revolving accounts with outstanding balances less than 49% of your high credit limit. We all have the tendency to use a certain card most of the time. Thus that card is always close to the high credit limit while other cards in our wallet go unused. This can be very detrimental to your credit score. For example, the credit score will be higher if the borrower has four cards that each have less than 49% of the available credit as the outstanding balance, rather than maintaining one account with the balance that is constantly close to the high credit limit. The best scoring requires a minimum of three to five revolving accounts. Active accounts that have been used in the last six months provide the best scoring. Feel free to actually apply for a couple of those constant applications you get in the mail. Read the small print and be selective, but, yes, 5 credit cards are a good thing if used the right way.

Credit History – This category relates to the length accounts have been open, which is a major factor, especially in evaluating marginal cases. The longer the account has been opened, the better when it comes to credit scoring, particularly revolving accounts. Credit acquired within 30 days is a big hit against the credit score. So if you are going to open a credit account to balance out your debts or to increase the accounts you have open this needs to be done well in advance of your purchase or refinance. Again there is no time like the present to accomplish these moves so that 3 to 6 months down the road your credit score has dipped and then actually recovered and gone higher due to your forethought. In the past I have recommended to my clients that they close certain accounts if they have say five to ten open accounts. The trick here is to close the accounts that have been open the least amount of time.

Type of Credit – Installment loans made to finance companies are a big hit against the credit score, and any late payments on these type of loans represent an additional adverse effect on the score. While many of these accounts are used by borrowers who take advantage of “90 Days Same As Cash” type promotions, many finance companies charge higher interest rates and can indicate that the borrower’s credit could not qualify for more favorable rates available through a bank or credit union. Simply give me a call before you take yourself down this road.

Inquiries – Inquiries from the same type of creditor within a 14-day period only count as one inquiry in calculating the score. The credit scoring model “stops” counting inquiries in the calculations when inquiries reach seven to ten in a 12 month period. Thus if you are shopping for a car over a weekend and visit 5 different dealerships that all pull your credit there should only be one hit to your score. Problem here is how these dealerships account for themselves when inquiring for your credit score. If one calls, himself, a car dealership and the next a large financial institution like Ford well multiple hits could occur. I have found that clients worry too much about inquiries in relationship to more important items that effect one’s score. Simply stated credit scoring is very favorable to balanced credit use. Lack of credit is an extreme and so is just using one big account.
Before you go out and pay a collection account that has been on your credit history for some time please give me a call. You might think you are helping yourself just before I pull your credit but in fact this could be very detrimental to your overall score. Paying the collections changes the “last activity date” to a current date and this will cause an adverse effect on your score unless done 6 months before we pull credit.

Whether you are a client of mine that has received this letter or someone that has been shown this information give me a call and lets be sure you get the highest scores possible on your credit. No question!

This is where you can save thousands of dollars with lower rates and better products by working on this foundation of your financial records – your CREDIT!

Article 2-

In December of 2004 the Fair and Accurate Credit Transactions Act, signed into law by President Bush, gives everyone a free annual credit report from all three reporting agencies. Access to these free credit reports has started December 1, 2004, however it is presently only available for selected western states. The good news is residents of Colorado can access their free report starting now.
Currently, a number of websites offer what are described as free credit reports, but all require trial subscriptions to credit marketing services. This new website, mandated by federal law, will be marketing-free.

Okay let’s get started with an informational guideline to said website. The website is www.annualcreditreport.com. When you get there you will be able to get a separate free report from all three reporting agencies: Experian, Equifax, & Transunion. Now each will charge you if you want your actual score an amount of $6.95. I would NOT recommend paying for the score! Simply take your absolute free credit report from each agency without the score. Naturally if you want your score for loan purposes give me a call and I will obtain that for you. My reports were 27 pages long so have a copier available or have the report emailed to your computer.

Now that you have obtained a free credit report from each you can actually use said report to dispute any erroneous information or accounts. Investigations may take up to 45 days but are well worth your work.

Your “Credit Score” has become the single most important criteria for loans. For example anyone with a credit score of 720 or above can state their income and assets with no hits to their rates at many underwriters. There are 100% financing loans available with no mortgage insurance in 80/20 programs for scores above 660. Second mortgages, including all home equity lines of credit, have rates completely dictated by credit score. I can’t emphasize enough the importance of your credit scores. You could save thousands of dollars with a small upgrade of your scores. Work diligently to keep your scores as high as possible. I am always available to go over your credit report and scores to help you improve your scores and get a lower rate in the future whether purchasing or refinancing.

Take a look at this website. It is well worth your time. If I can be of any help give me a call.

Steven F. Coombs