Insider Tips
How can I increase my credit scores?
By Dan Smith

How can I increase my credit scores?

For many home buyers, the first time they ever see their credit report is when they are making an application for a new home loan. For a few of those, that may coincide with a big let down when they find their credit scores are below average. Mortgage lenders nationwide have been using credit scores to qualify potential home owners for nearly a decade now, yet few people seem to understand how to protect and/or maintain the credit score they desire. Moving forward, the mortgage industry is now beginning to “tier” interest rates, to recognize those individuals who do maintain excellent credit. So it is more important than ever to gain a clear understanding of the credit scoring process.

First of all there are three main categories of credit a person can have. Those are revolving (credit cards or unsecured lines), installment (fixed debt repayment like a car loan), and mortgage loans for real estate. Each of the three bureaus recognizes these categories differently from one another, with distinct implications for credit management.

For example, you can shop for a mortgage at three to four different mortgage companies and have each one pull your credit report. Those “pulls” are referred to as inquiries. Since the credit bureaus recognize that the inquiry is being generated by a mortgage company, there is little, if any, impact to your score. On the other hand, if you applied for three to four credit cards in the course of the same couple of days, the outcome to your credit score may be substantially different. The bureaus are aware that those inquiries are coming from revolving debt vendors, so your credit score may loose several points. Revolving debt inquiries may be a sign that someone is borrowing from “Peter to pay Paul”, so to speak. So the score drop reflects that concern.

Another variable many people are unaware of relates to the percentage of revolving debt you have outstanding, compared to available limits. For example, let’s assume you have two people with identical incomes and financial pictures. Let’s further assume both owe $5000 in credit card debt. The only difference is that one of them has a $10,000 limit, while the other man is at his limit of $5000. In this example, the individual with $10,000 limit will have a substantially better score, because he is only at 50% of his available limit. So despite being counter intuitive, the second man could improve his score by simply raising the limit on his card, even though he has made no additional pay-down on his debt.

Real problems can occur when you combine these last two issues. Say you have three credit cards at 90%+ of their limit, and you apply for two new cards that have 0% introductory rates. In your mind you may just be engaging in credit shopping. But your credit score may take a double whammy. A month later that impact could adversely affect your ability to get the best possible mortgage rate. So be aware and try to plan major purchases accordingly. It may take several months without any inquiries to raise your scores back up.

Finally the best advise is always pay your debts before they become 30 days past due. So long as they do not reach that magic day, no adverse impact to your credit score will happen. You may pay a late fee, but the credit bureaus will never hear about it. If you are in a jam, you should also prioritize the debts by the three categories mentioned above. Pay mortgages first, installment debts second and revolving debts last. So if you do become past 30 days late, at least you will have minimized the impact to your score.

For expert advice on this or any other aspect of home finance, consult the expert. You can reach Dan Smith at 303-674-2205, or visit him at www.ColoradoHomeLoans.com anytime!


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