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How to raise your credit:
As we all know, credit is a key factor when determining whether your borrower will qualify for a loan or not. FICO score can be a make or break number. And, in today's market, exceptions for a few points are almost non-existent. As a mortgage professional, you have a few options. You can utilize one of the many credit repair companies and they will work with the borrower to improve the credit score. Or, if you have the desire, you can utilize some of the techniques listed below and work directly with the borrower to fix their credit and, possibly, get them into a loan that they may not have previously qualified for. Keep in mind that this takes time and that you will not see the immediate results. But, at the end of the day, it is well worth your time if it helps to create a happy and loyal client.
GET RID OF COLLECTION ACCOUNTS.
Did you know that paying a collection account can actually reduce the credit
score? Here's why: credit scoring software reviews credit reports for each account's date of last activity to determine the impact it will have on the overall credit score. When payment is made on a collection account, collection agencies update credit bureaus to reflect the account status as "Paid Collection". When this happens, the date of last activity becomes more recent. Since the guideline for credit scoring software is the date of last activity, recent payment on a collection account damages the credit score more severely. This method of credit scoring may seem unfair, but it is something that must be worked around when trying to maximize your score. How is it possible to pay a collection and maximize the score? The best way to handle this credit scoring dilemma is to contact the collection agency and explain that you are willing to pay off the collection account under the condition that all reporting is withdrawn from credit bureaus. Request a letter from the collector that explicitly states their agreement to delete the account upon receipt/clearance of payment. Although not all collection agencies will delete reporting, removing all references to a collection account completely will increase your score and is certainly worth the involved effort.
GET RID OF PAST DUE ACCOUNTS.
Within the delinquent accounts on your credit report, there is a column
called "Past Due". Credit score software penalizes for keeping accounts past due, so Past Dues destroy a credit score. If you see an amount in this column, pay the creditor the past due amount reported.
GET RID OF CHARGE-OFFS AND LIENS.
Charge-offs and liens do not affect the credit score when older than 24 months. Therefore, paying an older charge-off or a lien will neither help nor damage your credit score. Charge-offs and liens within the past 24 months severely damage the credit score. Paying the past due balance, in this case, is very important. In fact, if there is both charged-off accounts and collection accounts, but limited funds available, pay the past due balances first, then pay collection agencies that agree to remove all references to credit bureaus second.
GET RID OF LATE PAYMENTS.
Contact all creditors that report late payments on credit and request a good faith adjustment that removes the late payments reported on the account. Be persistent if they refuse to remove the late payments at first, and remind them that you have been a good customer that would deeply appreciate their help. Since most creditors receive calls within a call center, if the representative refuses to make a courtesy adjustment on your account, call back and try again with someone else. Persistence and politeness pays off in this scenario. If you are frustrated, rude, and unclear with your request, you are making it very difficult for them to help you. CHECK THE CREDIT LIMIT(S) AND EVENLY DISTRIBUTE THE BALANCES THAT ARE BEING CARRIED. Make sure creditors report credit limits to bureaus. When no limit is reported, credit scoring software scores the account as though your current balance is "maxed-out". For example, if you know that there is a $10,000 limit on a credit card, make sure that the limit appears on the credit report. Otherwise, the score will be damaged as severely as if carrying a balance of the entire available credit. Credit scoring software likes to see people carrying credit card balances as close to zero as possible. If it is difficult to pay down balances, read the following guidelines to maximize the score as much as possible under the circumstances:
· There are different degrees that scoring software can impact a score when carrying credit card balances.
· Balances over 70% of total credit limit on any card damages a score the most. The next level is 50% of the balance, then 30% of the balance.
· In order to maximize a score without having to pay down balances, evenly distribute credit card balances among all credit cards, rather than carry a large balance on one credit card. For example, if someone is carrying a $9000 balance on a credit card with a $10000 limit, and there are two other credit cards with a $3000 and $5000 limit, transfer balances so that there is a $1500 balance on the $3000 limit card, a $2500 balance on the $5000 limit card and a $5000 balance on the $10000 limit card. Evenly distributing balances will maximize your score.
DO NOT CLOSE CREDIT CARDS.
Closing a credit card can hurt a credit score, since doing so affects the debt to available credit ratio. For example, if someone owes a total credit card debt of $10,000 and the total credit available is $20,000, 50% of the total credit is being used. If a credit card with a $5,000 credit limit is closed, the credit available is reduced to $15,000 and will change the ratio to using 66% of credit. There are caveats to this rule: if the account was opened within the past two years or if there are over six credit cards. The magic number of credit card accounts to have in order to maximize a score is between 3 and 5 (although having more will not significantly damage a score). For example, if a card was opened within the past two years and there over six credit cards, you may close that account. If there are more than six department store cards, close the newest accounts. Otherwise, do not close any at all.
BECOME AN AUTHORIZED USER
If there is a short and limited credit history, the borrower can ask someone who is a primary account holder to add them to their account as a joint account holder or an authorized user. When added, the primary account holder's credit card will appear on the borrower's credit report. Credit scoring software will treat the added account as though it is the borrower's account and they will benefit from the low balance and the long payment history for that account. It is important to remember that being an authorized user is helpful for a credit score only if (1) the person is carrying debt below 10% of the credit limit and (2) has had good payment history on the card for seven years or longer. The longer the history, the better. Being an authorized user is potentially detrimental to a credit score if, for example, the primary card holder carries a high balance on the card and has had it less than five years.
KEEP OLD CREDIT CARDS ACTIVE.
5% of a credit score is determined by the age of the credit file. Fair Isaac's credit scoring software assumes people who have had credit for a longer time are at less risk of defaulting on payments. Therefore, even if old credit cards have horrible interest rates, closing those cards will decrease the average length of time that credit has existed. Use the old card at least once every six months to avoid the account rating to change to "Inactive". Keeping the card active is as simple as pumping gas or purchasing groceries every few months, then paying the balance down. An inactive account is ignored by Fair Isaac's credit scoring software, so a borrower won't get the benefit of the positive payment history and low balance that card may have. The one thing all credit reports with scores over 800 have in common is a credit card that is twenty years old or older. Hold onto those old cards- trust me! Preparing credit is a slow and time consuming process.
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