CREDIT. It’s one of the topics, kind of like politics or religion, that can either spark an enthralling conversation or send people running for the hills. You might be one of those people who cringes at the word because your score isn’t exactly working in your favor. Well, we have some good news! It doesn’t have to be that way anymore. Release the anxiety and follow along as we take you through 5 simple steps on how to improve your credit score.
Step 1: Be in the Know
Do yourself a favor and pull your credit score one to two times a year. We know it can be scary, but you can’t fix something unless you know what you’re dealing with and chances are it won’t be as bad as you think. Knowing your credit score will allow you to assess your current situation and begin taking steps to increase your score. There are many free options available that allow you to see your credit score and how it’s affecting your day to day life. A tip is to have your mortgage banker pull your credit report because they get more accurate scores and allows you to get one on one help if your score needs some TLC. Although CreditKarma.com, FreeCredit.com, and Credit.com are useful they do not serve you in quite the same way as your mortgage banker will.
Step 2: Reduce Your Debt Ratio
Your debt to credit ratio is a huge part of what makes up your credit score.The smaller the percentage the better and ideally you don’t want it to be any higher than 20-25%. If this is news to you, don’t worry! Make it your 2016 New Year Resolution and put together an action plan to reduce your monthly spending or increase your monthly earnings so you can comfortably put more money towards lowering your debt. Another helpful option is to call your credit card providers to inquire about raising your credit card limits. Increasing your limits can reduce your credit usage ratio, however, be sure not use the new increased limit to buy that new apple watch or pair of shoes you’ve been eyeing (I know it’s tempting) but that would be completely counterproductive. Having a maxed out credit card, for example, can lower your score by 10 to 45 points, but paying it down to that 20% mark can increase your score by the same amount. As your debt ratio begins to decrease so will your stress levels and you should happily see that score begin to RISE!
Step 3: Pay Your Bills On Time
Make sure you’re paying your bills on time. Your payment history makes up 35% of your FICO score. Often times you’ll hear people say that they always pay their rent, medical bills, utilities, insurance, etc. on time but they still have a low credit score. Well, unfortunately not all bills are created equal when it comes to affecting your credit score. In fact, certain on-time payments are not reported to the three credit bureaus Equifax, Experian, and TransUnion such as rental payments, utility bills, cell phone payments, cable bills and insurance bills. We are not saying neglect these bills because that could lead to collections which will affect your credit, but there are specific payments that if missed or paid late will be detrimental to your credit. So the big question...which payments will help my credit by faithfully paying them on time? These include monthly mortgage, credit card, auto loan and student loan payments. Pay these on time every month and your credit will improve. A great way to insure you are paying your bills on time to is to set up auto pay or bill pay through your bank.
Step 4: Keep Your Accounts Open, OLD and New
Closing old accounts can actually hurt your credit score. It shortens your total credit history and reduces your total credit neither of which is adding value to your FICO score. Closing accounts will not remove a late or missed payment from your credit history. Closed accounts along with their record are listed right along with the new ones. If you must close an account, close a newer one and keep the older one to establish a longer line of credit history.
Step 5: Shopping for a Loan? Think Fast!
Finding a lender to best suit your needs can be difficult and considering it is a big decision you may be tempted to take your time to shop around. However, this isn’t the best treatment for your credit score. See, when you apply for a loan the lender will “run your credit” a.k.a. send an inquiry to a credit bureau to see how responsible you are and your ability to pay back what you borrow. Too many of these “hard” inquiries could hurt your score considering it could mean that you are trying to borrow money from several different sources. FICO scoring is an intelligent system, however, and is designed to work with you in cases like shopping for the best rate for a mortgage or auto loan. It is just important to know that they look for condensed time frames to determine the difference so keeping the shopping window narrow is key. Do all your prospective searching within a 30 day window so that all your inquiries are compounded together and FICO can decipher between a legitimate inquiry for an ideal rate vs. hunting for money wherever you can find it. Choose a mortgage lender with a record in producing excellent rates and customer service and that will make the process a lot easier on your mental health as well as your FICO score.
See, we told you it wouldn’t be so bad! Credit is really a great topic to talk about when you know the steps to escape your credit crisis. Know there is always a way out and simply making slight edge decisions to improve your score will serve you so much more than living in the land of denial. California Mortgage Direct is here with open arms, for scores high and low, and we are dedicated to providing you with the best knowledge in the industry in order to help you find the best rates and loan options for your needs. Give us a call or go to our website and we would be happy to assist you!
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