Credit Score: Tips and Insight
It is pretty amazing to be able to provide mortgage loan options to borrowers around the country. In my home state of Indiana, I have clients not only here in Indianapolis and Central Indiana, but all the way from Jeffersonville and Seymour down south, to South Bend up north, while stretching as far east as Batesville and out west to Evansville. Friends, family, and potential borrowers, are always asking for advice on how to boost their credit score.
When it comes to increasing your credit score, I always love sharing a few pointers that I’ve learned since I joined the mortgage world.
First and foremost, when it comes to payment history it’s simple. Pay your bills on time, or even early. The very first thing a lender wants to know is if you’ve paid past credit accounts on time, especially the mortgage and installment debts. Payment history provides an indication on how financially responsible a borrower is and whether they can handle more debt. It has been said that history repeats itself so behavior in the past is the best indicator for the future. Multiple late payments within the past year on a mortgage or vehicle loan may prompt lenders to expect late payments down the road.
Occasionally, situations may come up and a late payment is unavoidable. If this occurs it is recommended to make the payment no later than 30 days past the due date. If payments are past that 30 day timeline, it may be disclosed to the credit bureaus and a 30-day late notation could be added on a credit report.
There is some good news though, if there have been some late payments in the past; time really does heal all. The more time that passes between the late payments that were made and the next credit pull, the better. More recent late payments will have greater impact on a credit score. One of the best ways to improve a credit score after a late payment or series of late payments, is to make sure payments are on time, every time moving forward.
One situation that occasionally presents itself that borrowers need to be aware of is as follows. A payment is 29 days late. Not ideal but it is under the 30-day mark. It is important to remember the next payment is due in two days and should be made on time. If both payments are not made this can lead to rolling 30-day late payments. It is discouraging to see reports when borrowers think they only had a single, 30-day late payment.
Credit cards fall under the category of revolving debt. Unlike a mortgage or car loan (installment debt) there is no predetermined amount. Whether it is a personal credit card or a store credit card, there is usually a credit limit. This credit limit states the maximum amount that the credit company is allowing an individual to borrow. Once a limit has been reached, future purchases cannot be made on that particular card because it is now, maxed out. It is imperative to know the limit on every credit card. This is usually listed on a monthly statement sent through the mail or on the website if bills are paid online.
When dealing with credit cards, experts recommend a utilization ratio (credit card balances relative to high credit limits) at or below 30%. To figure out that number, take the amount of the credit limit and multiply that by 30%. That number or below should be the goal for the balance.
For an example, if $10,000 is the limit, the 30% threshold would be $3,000. If the balance is over that, there are two options to improve the credit situation: Increase the high credit limit or decrease the balance. Increasing the high credit limit may not be a good idea and could lead to future issues. To get in a better financial position, it is advised to first stop using the card and aggressively tackle the balance as quickly as possibly.
Payment history and amounts owed are two main contributing factors to a credit score. They add up to approximately 65% of your FICO score. Knowing how to manage these factors properly will help to improve credit scores and financial standing. If you have questions, you may want to consider requesting a free consumer copy of your credit report.
Written By: Kristen Brasher, NMLS# 1434387, Loan Advisor at Royal United Mortgage LLC
Published: 12/02/2016