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Improving Your Credit
Rating
CMPS professionals are committed, qualified and
equipped to help you improve your credit
rating. Your credit scores usually determine the
price you pay for your money (your mortgages, your
auto loans and leases, your credit cards, business
loans, etc.).
Perhaps the most significant part of your credit
report is your credit score. Credit scores range
from 350 to 850, with 850 being the best possible
credit score that you could receive, and 350 being
the worst possible credit score. There are five
factors that determine your credit score:
#1: Your Payment History - 35% impact on your
credit score
Paying debt on time and in full has a positive
impact. Late payments, judgments, charge-offs,
collection accounts and bankruptcies have a negative
impact. One of the most important issues as far as
payment history is whether or not you have had any
late mortgage payments in the last 12 months. Timely
mortgage payments are weighted heavily by the
scoring systems and are one of the most vital
requirements that lenders look for when evaluating
your credit history. Many times a single late
mortgage payment within the last 12 months can hold
up your file or spell the difference between the
best interest rate and the next credit level. This
is not to say that your mortgage is the only debt
you should pay on time. Your payment history on
other debts (car payments, credit cards, etc.) is
also given a lot of weight.
The credit scoring systems evaluate how many late
payments you have had and whether they were 30, 60
or 90 days late, or whether they are currently in
default, with default being the worst situation.
Additionally the systems look at whether the late
payments were consecutive. If you only have one or
two minor late payments on your report with no other
derogatory marks, your score will not be terribly
affected, but you will have a tough time getting
over the critical 700 level.
Bankruptcies and judgments are another major area
of importance. If you have had any bankruptcies
within the last 7 years, it will seriously affect
your ability to borrow or establish new credit
accounts. Additionally, if you have had any
judgments within the last several years, it is very
important that you pay off the judgment and get a
"satisfaction of judgment" from the court. Any
unsatisfied or recent judgments will make a bad dent
in your credit scores and adversely affect your
ability to borrow. Usually, judgments and liens must
be paid prior to the closing. However, in some
cases, they can be paid out of the loan proceeds.
Here are four practical steps
that you can implement to improve your credit score
in the area of "Payments":
- Make all your payments on
time.
- Past dues on any account
will destroy your score - bring your delinquent
accounts current immediately. A 30 day late
payment one month ago is worse than a 90 day
late payment three years ago.
- Pay your bills before they
go to a collection agency.
- Check your credit report
for accuracy on a regular basis; and make sure
that disputed bills are not negatively affecting
your credit scores.
#2: The Balance You Owe vs. Your Available
Credit Lines - 30% impact on your credit score
Keeping your credit balances
below 50% of your available limit is very important.
Keeping your balances below 30% of your available
credit is even better. This is perhaps the single
most misunderstood part of credit scoring. There are
a lot of misinformed people that don't understand
how the credit scoring systems work, and yet they
insist on pretending to be experts in this area.
Here are just a few of the common myths:
- You should close all your
credit accounts if you are not using them.
- You should not have credit
accounts appear on your report after they have
been closed.
- You should not have any
open credit card accounts at all.
- You should not have high
limits on your credit lines.
First of all, the credit scoring system looks at
the percentage of debt that you owe compared to your
overall credit lines - not the amount of credit that
you have available to you. For this reason, most of
the time it is better to leave your credit accounts
open. By not using the credit that is available to
you, the system regards you as having enough
financial restraint and discipline not to overload
on debt. Remember, the credit scoring system looks
at the percentage of debt you owe compared to your
overall credit line.
For instance, if you owe $10,000, and you have
$100,000 of credit available to you, you are only
using 10% of your available credit line. On the
other hand, if you owe $10,000 and you only have
$20,000 of credit available to you, you are using
50% of your available credit line. This is
negatively interpreted by the credit scoring system
as being a strong dependence on credit. Furthermore,
if you owe $10,000 and you only have $10,000
available to you, you have "maxed out" your
available credit and your credit scores will be very
negatively impacted. Therefore, it is not how much
you owe, but how much you owe compared to what you
are able to borrow.
Additionally, if you have no debt and no credit
lines open or available to you, you will end up with
a lower score than someone who has no debt and a few
lines of credit available to them. Financing is a
game of percentages and ratios. The credit scoring
system does not look at the dollar amount of debt
you have; only the balance you owe, compared to how
much credit is available to you.
Here are three practical steps
to improve your credit score in this area:
- Do not close your credit
accounts unless it is necessary to do so. It is
better to have many open accounts with little or
no balance than to have just one or two accounts
regardless of the balance.
- Do not concentrate large
balances on just a few accounts. Pay outstanding
debt down as close to zero as possible, and
evenly distribute the remaining balance across
all your open credit lines. The key is to keep
the balances down below 30% or at the very least
50% of your available credit line(s).
- Call your credit card
companies and try to increase your available
credit lines if they can do so without pulling a
new credit report.
#3: Your Credit History, or how long your
accounts have been opened - 15% impact on your
credit score
The longer your accounts have been opened, the
higher your score will be; newly opened accounts
will bring your score down.
Here are three practical steps
for you to improve your score in this area:
- Do not close your credit
accounts. If you have too many department store
credit cards, close the newest ones - do not
close the old accounts. If you keep your
accounts open and use them every once in a
while, your score will improve over time.
- Think twice before jumping
on that latest 0% credit card offer or opening a
new credit card just to get a 10% discount at a
department store.
- If you don't have much of
a credit history, and you are planning on taking
out a mortgage in the future, it would probably
be a good idea to establish a few open credit
lines with little or no balance on them.
Although newly opened accounts tend to lower
your score initially, they will improve your
score once they have been open for a while,
somewhat active and paid off with little or no
balance.
#4: The type of credit that you have open -
10% impact on your score
A good mixture of auto loans and leases, credit
cards and mortgages is always best. Too many credit
cards is not a good thing, and having a mortgage
does increase your score.
Practical steps to improve your
score in this area are:
- Having 3-5 revolving
credit cards open is optimal.
- Having a good mix of auto
loans, credit cards and mortgages is positive
for the score; rather than having a
concentration in credit cards only.
#5: The number of recent inquiries that have
been made by creditors - 10% impact on your credit
score
Inquiries affect the score for one year from the
time the inquiry is made. Personal inquiries do not
count toward your score. In other words, you can
check your credit report as often as you like and
that won't affect your score. The score is only
affected if a potential creditor checks your credit.
Potential creditors include credit card companies,
auto finance companies, department stores and
mortgage companies.
The reason that inquiries impact your credit
score is because the scoring system assumes that if
you have many recent inquiries, you must be strapped
for money and in some type of "panic" mode, trying
to get credit wherever you can find it. The system
also assumes that all these inquiries will
eventually result in new accounts being opened, and
as stated before, the system doesn't like you to
open new accounts and punishes you by giving you a
lower credit score.
Here are three practical steps
that you can take to improve your credit score in
this area:
- Multiple auto and mortgage
inquiries are treated as only one inquiry if
made within 45 days of each other. So, it is
better to shop for a car or a mortgage over a
two week time-frame, rather than to prolong it
over a longer timeframe.
Click here for more info on how to get a
good deal when shopping for mortgage.
- Don't apply for a lot of
credit or open multiple credit cards at the same
time.
- If you are thinking of
applying for a mortgage within the next 90 days
or so, it would be good to wait until after your
mortgage closes before you apply for any new
credit.
CMPS professionals help you
implement these and other strategies that improve
your credit rating.
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