I quite often meet with new clients who want to apply for financing and are looking for the best “A” mortgage rate possible. Everything looks good…until I check their credit. There are many different cases where clients of mine have poor credit for no really good reason. It is always rationalized to me by saying “The minimum payment is only $10 per month, I didn’t think it was a big deal” or something similar to that effect.
I would have to imagine that a significant amount of growth in the economy and billions of dollars in unnecessary high interest debt is being lost due to lack of understanding of the credit bureau system and carelessness of borrowers.
With this in mind, here are a few facts about credit bureaus and ways that you can improve your credit.
- Make your minimum payments on all borrowing. This is the most critical single issue with credit and it stays with your bureau for 6 years, although it weighs less on your score the further into the past it is.
- Keep your loan balances below 70% of your limit as much as possible. The credit bureau algorithms heavily penalize credit that is close to maxed out, although this is easier to fix and does not stay with you for the long term if you pay down your limits.
- Use it or lose it. Having credit with a zero balance on credit that is never used is not really helpful in determining your credit worthiness. Use all your credit once a month, (even if the purchase is a small one) and pay in full when the bill arrives if you wish to improve your credit score but avoid interest charges.
- If you have a balance on a high interest loan, find out what products the lender offers with a lower rate and ask to transfer the credit to those. For example, I had a client who had a credit card that they were carrying a balance on and paying interest on. They simply called the bank and asked to close the card and open a credit line instead, and the bank was able to do that for them without even checking their credit. This can help make debt more manageable, easier to pay down, and will ultimately improve your credit score.
- Have at least 2 different lending products (line of credit or credit cards). If you have less than 2 credit products, you will often not be eligible for lenders products. This is particularly true with mortgages.
- If you need to get a high interest loan to establish credit, don’t get a car loan. I have had clients come to me who are paying 20% interest on a car loan who told me they had to get the loan to establish credit. There are many other better ways to do this that will be much less expensive than a high interest car loan.
- Reference lenders from utility and cell phone companies can help you to get started in building credit. If you have several different bills that you pay every month, even if they are not listed on your credit bureau, they can help you show responsibility and can help when you are applying for credit.
There are many different things that you can do to build or improve your credit, and every circumstance is an individual one. Part of what I do with my clients is to council them on this, and even if I cannot help them buy a home now, I can tell them what they need to do to improve their situation so they can qualify in the future.
If you are looking for a mortgage to buy or refinance a home and are concerned about your credit and need someone to help you navigate the way for you, then fill out the form below and I will be in touch with you shortly.