A lot of the people that come to hear me speak or contact me for a credit consultation have the same goal, to purchase a home or refinance the current mortgage loan they have. Usually they contact me after they have discovered that their current FICO score is not high enough to accomplish that goal. Since this is a common theme, I had the idea to write a few helpful tips for people in this situation. Please feel free to share this with your friends or clients that might benefit from this.
Understand the score you checked
For clarity sake let us start by me telling you that the score you are probably using as the basis for determining whether or not your score is good enough or needs improvement is most likely not an accurate score. All of these websites and services that sell you or allow you to view your credit score are not the same score your mortgage person will utilize. Be careful putting too much emphasis on the value of these scores. In my opinion if you want to get an idea of what your FICO score might be, two of the more accurate and free websites are CreditKarma.com and CreditSesame.com. Again these are not true FICO scores (which is what your mortgage will be accessing, but they are usually two of the most accurate as a gauge). Most of the other sites out there I never recommend to people because they typically are too far off in the range or model they use.
Take Action
One of the fastest and easiest things you can do to improve your score is to understand the importance of your credit cards on your credit report. More specifically the balances that you are currently carrying on those cards. A very important factor to your FICO score is the percentage of revolving credit you are utilizing at the time of the report. A simple tip, the lower the balance on your credit cards the better when it comes to this. If your goal is to improve your FICO score in the next few months start by making your main goal to pay off your credit cards.
Stop using your credit cards
Now that you have paid off or paid down your credit cards you want to get the benefit of those lower balances on your credit report. This can’t be accomplished if you keep charging on those cards every month. All credit cards have cycles; there are different days where the credit card issuer reports the balances on your cards to the credit bureaus. This date is not the same as the due date. To get the score benefit of this action, after you pay the cards off, stop using them (do not close them) then wait 45 days before you apply for your mortgage. This way you will actually get the score benefit of having these cards paid off!
You’re not done yet
Once you have been told that you are approved, that doesn’t mean it is time to start using the credit cards again or applying for new credit. A lot of lenders pull a new credit report late in the process. You do not want to jeopardize your loan because you decide that a new couch would look nice in the house that you don’t own yet. Keep the balances at $0 and don’t apply for anything until after the loan is closed!
I understand that everyone’s situation and credit is different. These are just a few simple tips that would benefit the large majority of people that I talk to.