Credit “D”

A few of these easy steps can improve your standing among the credit bureaus !

GOAL:  The minimum goal is to have three good lines of credit with Zero lates for the past twelve months. (See #10 and #14)

Tip #1: How (not) to pay collections
Ethically one should always pay outstanding debts. However, you should be aware that paying old, delinquent debts to a creditor may negatively affect your credit score. It is complicated.

Historically there has been a bug in the FICO system, which actually lowered your score for paying off an old debt, when it had gone to collections. The reasoning was the debt was old and paying it makes the account new. This causes your score to go down.

In this case, you are penalized for doing the right thing. Usually, an original creditor will sell off delinquent accounts after about six months, to a collection agency. Collection agencies may negotiate a deal with you, as they purchased your debt for pennies on the dollar.

Important to know is what to negotiate with them. If you settle for an amount less than you owe, it will be reflected on your report (marked as “settled”) and your score will go down. Negotiate your old debt to be marked “paid in full” and your score will not go down.

Many collection debts DO NOT need to be paid to qualify for a mortgage (ex: med bills). Call your loan officer to confirm if you need pay any collection to qualify.

Tip #2: Use older credit cards
The longer you have had a line of credit open, the better your score will be. Use the older cards (making sure to keep the balances low), keeping them active.

Tip #3: Do not open a lot of new accounts at the same time
Do not open a lot of new accounts at the same time. If you do your “average account age” will go down which will lower your credit score. In addition, creditors will become nervous that you are suddenly adding credit lines. Build slowly.

Tip #4: Do not consolidate credit cards
Typically if you consolidate your credit cards, you need to apply for a new credit card. This will affect your score all on its own. Then if you transfer all your balances over to the new card, you will max out the new credit line, which will really lower your score. It is better to have a few cards with low balances, than one card with a high balance.

Tip #5: Rate shop within a limited time frame
If you are shopping for a car and plan to visit a few dealers, make sure to only have your credit pulled in a few of the locations and make sure it is within a short time span (a week or two). Your score will only go down a few points (as if you only pulled it once). Rate shopping is seen as a good practice by lenders, so they don’t penalize you.

Tip #6: If possible, get different kinds of credit
Your credit score will go up if you can show that you can use different kinds of credit wisely. Installment debt, revolving debt, etc. should ideally all be in your report.

Tip #7: Do not close out credit cards
Even if you are no longer using a credit card, keep the account open, especially if it is an older account. Its age will help you. Also you shouldn’t close accounts which are still active, because the limit will go to $0, but you will show a balance, which will increase your debt to credit ratio.

In addition your overall available credit will go down, causing your overall “credit utilization” to go up (the ratio of your overall debt to your overall credit limits combined).

Tip #8: Make more than one payment per month
Credit repositories gauge how well you monitor your credit and multiple payments per month indicate you are a careful consumer interested in protecting and maintaining your credit.

Tip #9: Keep credit card balances below 30% of credit card limits
Calculate when your credit card issues your statement. Before that date, log into your online credit card presence and pay the balance to below 30% of your credit limit.  Pay your balances down before your credit card reports!

Tip #10: Ask your loan officer about authorized user accounts
Your stable network of family and friends contribute to you being a good credit risk. Becoming an authorized user of a low balance, always paid as agreed credit account improves your good accounts to bad accounts ratio and good credit longevity.

Tip #11: Monitor your credit report for errors
What you measure will improve! For a free copy of your credit report, visit:
https://www.annualcreditreport.com/cra/index.jsp 

Tip #12: Monitor your credit for free
What you measure DOES improve! Sign up at www.CreditKarma.com 

Tip#13:  Go to www.optoutprescreen.com to remove yourself from prescreened credit offers (junk mail); this may increase your score 5-10 points; you can always opt back in.

Tip #14:  Building Up Credit Scores
One needs at least 3 good lines of credit. To build your credit score fastest, take between $500 and $10,000 to your credit union. Tell them you will like to open a savings account with this money and then get a secured installment loan with your savings account as collateral.  Also open a checking account for an automatic monthly payment so you will not miss any payments.  You can take the same money they lend you and repeat the process at another credit union! Now you have two installment credit lines. The next day, pay these loans down to 50% of the limit; if you started with $1000, pay it down to $500 (both accounts).  Make at least two payments per month and in the seventh month pay it off. Do as many of these installment loans as you like – I usually had three + going during my credit rebuilding phase.
Installment loans build your credit score twice as fast but you will also need one or more revolving credit card accounts. It is very likely one of the credit unions will give you a secured credit card. If you already have a revolving credit card, skip this step but you MUST keep your balances below 30% of your limit. Know WHEN your card statement period ends and pay down the balance BEFORE the end of the statement period. 

Call to brainstorm and get your Pre Qual Letter! 

Michael Alvarez NMLS 257246

(561) 962 – 5835