Most people, including those of us in the business, do not know a lot about the credit scoring algorithms. Those are considered industry secrets and intellectual property by the three big bureaus. That being said, I wanted to demystify some assumptions that you might have had about credit scores and the ways they are determined. Armed with this information you should be able to go out and make changes to positively improve your scores.
First things first, your income is not taken into account when your score is pulled. To some people that may seem to be a flawed system. Bill Gates could have some credit dings that lower his score to say a 620. Even though he is the richest man in the world, he would be paying in the 7’s for an interest rate. Doesn’t make sense right? So remember, you can make $30,000 and have 800 scores or make $300,000 and have 500 scores.
Secondly, paying off and closing a credit card completely is a bad move. The only time this would make sense is if you had a bad history with the card. Otherwise what you are doing is erasing that good history you had with that card. Closing a newer card, 6 months old or sooner wouldn’t be so bad, but closing your Visa you have had since you got out of college could be erasing some of the best aspects of your credit. Remember, your credit score is based on how you can handle debt. So, paying a card in a lump sum and closing it isn’t creating a pattern that the credit bureaus deem to be good debt management behavior.
Third, the simple act of raising your credit card limits could improve your scores. In our industry, we work a lot with ratios. For credit scoring, they like to see your balance to limit ratio under 30%, and preferably between 30% and 50%, but not over 50%. Say your balance is over 50% (or you have a limit of $1,000 dollars and your card balance is at $501). Assuming you have had good history with the credit card company, it is simple to call the card and ask for a limit increase. They will perform an underwrite on your account to see if this makes sense to do. If you want to assure yourself of getting the increase then you tell them you recently got a raise. They do not cross check this, but remember to make it reasonable because at some point they should’ve gotten a salary from you. This always ensures a bump up and now you are at a limit of $2,000 dollars, and your balance is still $501. Therefore, your ratio went from 50% to 25%, which in turn will raise your credit score the next time this is reported. I have seen this raise scores in upwards of 20 points.
Fourth, try to do your best to limit the amount of inquiries. An inquiry is when a financial institution pulls your credit. A way to limit pulls is if you know you are shopping for a car soon, call your lender or pull your credit yourself and then walk into the dealerships with credit report in hand and then when they say we are going to need to pull your credit, you hand them the file and they can look at it right there. Then if you don’t move forward, there is no pull on your file. A typical inquiry can harm a score 3 to 5 points.
Fifth, do everything in your power to fight erroneous information or negative information. If you happened into a collection and finally paid the bill, call the collection company up, put on your sweetest voice and create a story. You just had twins and you are doing everything in your power to buy a house, but you have this collection showing up and you really, really need a deletion letter to remove this mark from your score and move on with a home purchase. Sometimes this works, sometimes it doesn’t, but be proactive and try. You can only be mad at yourself if you don’t try. I would say in my experience this works 50% of the time.
Lastly, pull your report every 3 to 6 months. With your information being out there and all over the internet, you want to make sure nothing funny is happening. Your credit is your lifeline to good interest rates and if that gets damaged whether it is your fault, your ex-spouse, or your kids, you need to be informed so you can get it fixed right away. Look into the identity theft prevention companies as well; they will do a great job at protecting your best interests in the credit world.
Good luck and get those scores up!! We like to see 680 or higher in this industry and a 720 and up is like an A on a paper, so do all you can to achieve that. Your reward will be saving hundreds of thousands of dollars over the life of a loan in interest payments. Now that is retirement money.
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