Revisiting Credit Scores and How to Improve Them

In the Bay Area, cash has been “king.”  Whether you pay for an entire house with it, or you have loads of it in the bank to use for qualifying, everyone talks about it when referring to their profile.  With salaries and bonuses setting new records in San Francisco and the Silicon Valley, this is the one area where people “tout” their buying power.  Another place, however, that people can create separation in a market that is so competitive is their credit score.  In the SF market, scores range all over the place, regardless of cash and income situations.  Whether low, middle or high, everyone wants to know how to improve credit score numbers.

Improving your FICO credit score goes beyond just improving your chances of obtaining a mortgage.  It could also reduce your auto insurance premiums and, possibly make you a more attractive employment candidate.  FICO scores range from 300 to 850. Mortgage applicants get the best mortgage rates and terms when their FICO scores are 720 or higher, as a rule of thumb.

For borrowers of all FICO scores, the best way to improve your credit rating is to understand the factors that make up your FICO score, and to take specific actions that can make a positive impact on your score.  Everything is workable, and although discussing credit and individual scores can be a touchy/sensitive subject, everyone should know that we can assist in guiding you regardless of where you fall on the spectrum.

First things first – we would quickly review exactly WHAT is included in your FICO score.    The FICO credit score takes into account a combination of all of the information found in your credit report, and is made up of the following:
 
  • Payment History : 35 percent of your overall FICO
  • Total Amounts Owed : 30 percent of your overall FICO
  • Length of Credit History : 15 percent of your overall FICO
  • New Credit : 10 percent of your overall FICO
  • Type of Credit in Use : 10 percent of your overall FICO

To find out what is impacting your FICO score you will want to review your credit reports.You can obtain a free copy of your credit report from each of the three main credit reporting agencies — Equifax, TransUnion, and Experian — at www.annualcreditreport.com or when applying for a mortgage with me (click here to APPLY NOW).  FICO scores are generated based on a snapshot of the information on your credit report as of the particular moment that the report is pulled. Correcting errors is crucial, therefore, to ensure the highest possible FICO score.

5 quick steps to improve your FICO score

1. Verify your accounts are current

“Payment History” makes the largest impact on your FICO score at 35 percent of your overall score. It is vital, therefore, that you keep current on all of the accounts reporting to your credit report.  When reviewing your credit report, should you find any accounts that are past due, catch them up as soon as possible and pay at least the minimum payment required within 30 days of the due date.

As a rule of thumb  – with 12 months of clean pay history and no late payments, you can dramatically improve your FICO score. And, with 24 months of clean pay history, the improvements can be even bigger.  FICO considers the number of accounts paid as agreed as compared to the number of accounts with late payments, along with the severity of those delinquencies.  90-day late payments make a more negative impact than 60-day late payments; and 60-day late payments make a mortgage negative impact than 30-day late payments.

2. Dispute anything that is inaccurate

Inaccuracies on reports are very common, and should you detect any errors on your credit report, you will want to request a correction as quickly as possible.  In order to make a correction, use the information on your report to contact the credit bureaus, and also the creditors which provided the erroneous data to the bureaus.

By law, the credit bureaus are usually required to investigate the item in question within 30 days, unless they consider your dispute to be frivolous. You may need to submit documentation that supports your position. Send copies only — never originals.  Then, within 45 days, the credit bureaus will notify you with the results of your investigation. Getting even one late payment removed from your credit report can improve your FICO score dramatically, so any effort here can be worth it!

3. Ask for an exception

Sometimes, a creditor may be willing to “help you out”.  In cases where you make a relatively small slip-up, with a creditor you’ve never been late with, you can sometimes get a late-payment “waived”. It’s always a good idea to make a phone call and to ask for a little grace.  There are many examples of creditors removing a late payment from your credit report if there’s a legitimate story behind what happened, and if you can explain what steps you’ve taken to avoid a repeat occurrence.  Bear in mind this works best if you catch the delinquency early and bring the account current right away.

4. Clear up collections, charge-offs, judgments and liens

Old collection items, credit card charge-offs, and judgments and liens can hurt your FICO score, too. If you’ve got any of these on your credit report, it’s time to contact your creditors and collection agencies and to settle up one-at-a-time.  First, settle the accounts which went delinquent within the last 24 months because these more recent accounts create the biggest drag on your FICO credit scores. Then, in looking at your collection items over 24 months old, proceed with care. This is because FICO puts the most weight on your recent credit history, which encompasses the last two years only.

This is why your FICO score may drop when you pay off a collection account over 24 months old. Once the account is paid, it becomes “recent”, causing damage to your score.

In many cases, you can negotiate with your creditors to remove a trade line completely in exchange for settling an account for its full balance. You need to call your creditors first, however, to find out.

5. Improve your debt utilization ratio

This one is more immediate and can get you an instant boost, by improving your “amounts owed”, or debt utilization ratio. Debt utilization makes up 30% of your FICO credit score and is a measure of how much you money you owe to creditors as compared to how much credit is available to you.  The FICO scoring model takes into account the utilization of each individual credit account; and the utilization of all of your credit accounts combined.

For example, if you have five credit cards, each with a $2,000 limit, you have a total $10,000 available credit over all five accounts. If you carry a $1,000 balance on one of the five accounts, you would have a 50% utilization on one card and a 10% utilization over all of your credit.  In general for your reference – debt utilization of 30% of less is good for FICO scores. Utilization over 30% is often bad.

So, the best way to improve your debt utilization ratio is to pay off debt.  Prioritize by paying revolving accounts down first, followed by your installment debt.

Email Me anytime to learn more about credit reports, scores and how to improve them.