Four Tips to Improve Your FICO Score
These days lenders are using more ways than credit scores to decide whether to approve applications for mortgages. Trended credit, for example, provides a long-term view of how borrowers’ credit behavior, an alternative to the “snapshot” of a credit score.
Over the past year, median FICO scores for approved loans have fluctuated from a high of 731 in August to 720 in February 2017. Despite continued pressure on lenders to relax standards, the median FICO for mortgages is only two points lower today than it was in 2014 after declining from 750 in February 2012.
Marginal borrowers stand a better chance of getting approved for an FHA loan than a conventional mortgage. The median FICO for an FHA purchase loan is only 649. FHA loans also require down payments of only 3.5 percent, but borrowers will also be required to carry mortgage insurance.
Credit scores are still the first thing most lenders look at when deciding on a mortgage. Lenders also use them to set rate, since lenders and the investors to whom they may sell your mortgage require compensation for incurring the risk that a low score represents. A low score can raise your mortgage interest rate by as much as one and one-half percentage points.
The best way to guarantee a good score is to practice good credit habits whether you are planning to use your credit soon or not. Building a good credit score takes time, especially if you are recovering from a tax lien, bankruptcy or default. If not, and you have average credit and want to polish it up before you apply for a mortgage, here are four tips that will help you raise your score in a few months’ time — as long as you don’t hurt yourself by failing to pay bills on time.
1. Pay down debt every month, especially revolving credit card debt.
Installment credit comes in the form of a loan that you pay back in level payments every month, like a car loan or mortgage. Credit cards are revolving loans, where the borrower makes charges, pays them off, then continues to make charges.
A significant portion of your score comes from your total amounts owed. A big variable here is your credit utilization ratio, which is the percentage of how much you owe on your cards compared to your available credit. Most credit scoring models penalize you for using more than 30 percent of your available credit and installment debt is usually not factored into this ratio. Thus your credit cards have a huge role in your overall score. You have to be careful to pay your bills on time, AND you also need to keep a close watch on how much credit you’re using.
Get ahead of this curve by limiting your use of plastic, living on a cash basis and paying off more than your minimum each month.
2. Avoid unnecessary credit checks.
One good reason not to increase your available credit as you try to improve your score is the price you will pay every time a lender checks your credit. These inquiries could lower your credit score by a few points and may remain on your credit report for two years. As time passes, the damage to your credit score usually decreases or disappears, often even before the hard inquiry falls off your credit report but you may not have time.
However, even one hit from a credit check could move your score from a “good” to “fair” category and put you on the bubble for approval. Make it easy for yourself. Don’t apply for more credit until you apply for a mortgage.
When you do, don’t apply to three lenders at once. You probably won’t get a significantly better rate from one lender to another, but you could lower your score into the danger zone. (Lenders advertise “bait rates” that are the very best they give, not what you will be offered. And remember, a lower score means a lower rate.) Apply to just one, take the hit and see what happens.
3. Pay off small credit card balances.
Every time you pay off the balance of a credit card it improves your score. Go through your cards and pay off the small balances as quickly as you can.
If you don’t have any obvious candidates, pick a card with a high-interest rate and concentrate on paying it off as soon as you can at the same time that you pay more than the minimum on your other revolving debt.
However, once you have paid off a card, don’t cancel it if you have had it a long time. Keep your oldest cards. Lenders like to see that you have a positive history over time
4. Get your credit utilization ratio below 30 percent and keep it there.
As noted above, your credit utilization ratio should be no more than the total credit available to you. Calculate your credit limit for each revolving loan and add up your current debts. Then add up your current debt. You can lower your ratio by increasing you limit on one or more cards, paying down debt or both. Ask your creditors to increase your limit, i.e. make that MasterCard good for up to $3,000. If you can get your ratio down to 10 percent, you will see a marked improvement in your credit score.
Your efforts to improve your ratio will be wasted if you start using your credit cards again because you have higher limits. Once again, to supercharge your credit repair you MUST do your best to live on a cash basis.
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