Loan officers and mortgage brokers often see potential home buyers fall a few points short of qualifying when it comes to credit score, but that doesn’t mean they need to be turned away. In fact, there are strategies we can employ to increase a borrower’s credit score by 5, 10, or even 25 points in a short period, allowing them to qualify for the loan they want.
In part one of this blog, we covered the first four strategies, including paying for deletion, goodwill late-payment removal, removing authorized-user accounts, and removing federal liens.
Here are the remaining six strategies to help your borrowers achieve a quick credit score boost:
A note on revolving account balances:
The first two strategies we’ll cover today have to do with revolving account balances. A significant portion of your credit score is calculated based on your credit utilization ratio, which is the amount of debt you owe compared to your total available account balances. A high credit utilization ratio (like if you have a $5,000 limit but owe $5,000, or a 100% utilization ratio) will lower your score while keeping balances low (like owing $500 of that same available credit for a 10% ratio) will improve your score.
Strategy #5 Paying down balances.
Credit experts suggest keeping a utilization ratio of 10% or less to achieve a great credit score. In fact, a survey of those who had the top scores revealed their average credit card balances relative to their limits was just 7%. However, don’t go all the way to 0% because it won’t show an established payment history they can use in their calculations (you won’t have any payment.) FICO calculates 30% of their scoring model by the overall money you owe and how close you are to the limits on your credit cards and revolving debt, so low balances and healthy ratios are the key to a top score. So the easiest strategy to give your score a quick boost is to pay down debt if possible.
Strategy #6: Pay by the report date, not the due date.
We always think about paying our bills on time before their due date, but another tactic to raise credit score is to pay them by the date that credit line reports to the bureaus. That will help show lower balances if you frequently use your accounts or credit lines. Call your creditors and ask what day of the month they report.
Strategy #7: Transfer balances.
Paying down credit balances only works if you have the funds free to do so, of course, but there may be another way to achieve a better utilization ratio. Some consumers can transfer their credit card balances to their spouse’s credit card, which will drastically improve their personal ratio. They may even be able to transfer some of their credit card balances to an existing home equity line of credit, since HELOCS are usually reported as mortgage debt so that they won’t hurt their utilization ratio.
A note on credit history:
When it comes to credit history, older is better since 15% of FICO’s scoring is calculated by the credit history. In fact, most consumers with scores over 700 have an oldest account that’s 19 years old, with the average age of their accounts is between 6 and 12 years old, and their most recent account 27 months ago or more.
Conversely, your score will drop if you have too many new accounts or just-opened credit cards and accounts. Closing these well-established accounts will see your score drop, too.
Strategy #7: Become an authorized user on someone else’s credit card.
Perhaps the most efficient way to increase your credit score in a short time is by becoming an authorized user on someone else’s credit card. Once you’re authorized, the new positive trade line will show up on your credit within 30 days as if you’ve had it for the duration. It’s important you do this correctly – it has to be a credit line in great standing and make sure you offer your social security number, so they report it to the credit bureaus correctly. Additionally, it should be someone you trust well (and they trust you!) because if the primary user runs up big debt, has late payments, or defaults, you’ll be on the hook, and your credit will actually be damaged. But FICO knows a lot of parents do this to build their teen or college-aged children’s credit – and it’s a perfectly legal practice, but check to see if the lender has specific requirements or rules for added tradelines.
Strategy #8: Consolidate.
Sometimes we have multiple credit cards or accounts with the same bank. Consolidating these into one account can help raise your credit score in certain circumstances – namely if you can blend a newer account into an older account. That will help show longer term, seasoned debt and give your score a positive jump, but be careful to manage this one correctly because you also don’t want to throw your ratios out of whack.
Strategy #9: Add an account to the credit report.
A surefire way to increase credit is to add positive accounts that aren’t currently being reported. Although FICO doesn’t actively publicize this information, you can do that by requesting unreported accounts be reflected on your credit. Think about any company that pulls your credit and you pay the bill on time. For instance, cell phones, Internet providers, utility companies, and medical billers often don’t bother reporting credit (because it’s not mandatory.) But if you ask them to do so, they very well might comply – posting a well-seasoned, positive new trade line on your credit score.
Strategy #10: Check your credit report for errors and then dispute them.
The first step should always be to get a current credit report and review it line by line. Blue Water Credit is a great resource to help you with this every step of the way. Remember that there are three major credit bureaus and they each may report different information, so we’ll check all three, looking for errors on larger accounts first, length of history, payments reporting on time, and that your balances are accurate.
After this review, we highlight inaccuracies or items that are hurting you that can be addressed. Next, we can officially dispute each and every inaccuracy or error, no matter how big or small, resulting in a significant credit score increase in short order with Blue Water Credit!