An Insider’s Guide to Credit Preservation
Credit preservation is proactive act of doing the right things to increase your credit scores.
In many cases, your credit scores can also have a direct impact on your closing costs.
With 20 years experience in the mortgage industry, i’ve spend a lot of time coaching homebuyers and homeowners through credit challenges to qualify, or preserve credit scores through the home loan process.
Over many years, we have run into many little tips and tricks to help you get into a better position to qualify.
3 Best Practices for Better Scores
More often than not, I see credit scores suffer not because of bad credit, but from the lack of good credit and purposeful credit utilization.
These are some of the most common ways to increase, or preserve your credit scores.
1. Utilization of Revolving Debt
This probably the quickest way to raise, or drop, your credit scores. Utilization of Revolving Debt is a fancy way of describing how you use your credit cards. Maxed out credit cards can lower your credit score considerably.
Best Practice: Keep outstanding credit card balances below 30% of high credit limit. Avoid cancelling credit lines unless a requirement of the loan approval.
2. How Many Credit Cards Should I Have?
This is a question we get quite often. While there is not a single “magic number” that will guarantee a better credit score, having 1 to 2 revolving credit lines, or credit cards is probably a good rule of thumb.
Best Practice: Having a minimum of 3 trade lines on your credit report is a best practice. An auto loan, or student loan (term loan) will probably be one of or more of those credit lines. You need at least one (1) revolving credit line to take advantage of the utilization of revolving debt scoring factor outlined above.
3. Paying Off Old Collections
It seems like a logical step toward “cleaning up” your credit report. In most cases, if the collection is more than a year old, paying it off can actually hurt your credit scores in the short term.
One of the factors in calculating your credit score is recency of event. Paying off an “old” collection makes it a “new” derogatory event, a paid collection.
Best Practice: Do not pay off collections before speaking with a loan specialist. In many cases, collections and charge offs will not need to be paid off. In the event that they do need to be paid, you’ll want to make sure it will not throw your qualification out the window.
How Do Inquiries Impact My Credit Score?
Whether you are shopping for a new car, or if you’re shopping for a home mortgage, it is expected that you may shop several companies before making a decision to work with one specific company.
New laws allow consumers to rate shop for credit cards and loans without taking a hit on their credit scores. The new inquiry timetable looks at what are considered “like” inquiries.
As an example, you can shop for multiple auto loans within a 45-day period. No matter how many auto dealers you visit, the inquiries are all auto loans, and are therefore considered “like” inquiries. If you shop for multiple auto loans within a 45-day period, their actions will appear as only one inquiry on your credit report, no matter how many auto loans you actually applied for.
This also holds true for mortgage loans, credit card offers and other extensions of credit. As long as the inquiries are considered similar, only one inquiry will appear on the credit report within an isolated 45-day period.
However, if you shop for a mortgage loan, an auto loan and a credit card within in 45 days, this will appear as three inquiries on the credit report, and that’s going to negatively impact your score. The reason for this is because you have shopped for three different categories of “like” loans or credit offers.
In addition, a 30-day provision has been added for mortgage loans and auto loans. If you shop for a mortgage loan within a 30-day period, you will NOT receive an inquiry on your credit report. The same holds true for an auto loan.
However, as soon as you go beyond the 30-day period, you are now in the 45-day provision, and all inquiries will count as one. For this reason, it is always best to shop for a mortgage or auto loan within a 30-day time period.
Don’t Pay For Credit Repair
There are a million different credit repair options out there, and quite honestly, everything you are being charged for you can do on your own for free.
I’m not saying that credit repair companies are a bad idea. In some cases, they may offer a great deal of convenience if you’re willing to pay the price. Before you spend any money fixing your credit, there are tools and experience that lenders have to help get you to where you want to be.
In many cases, there are free, and easy things we can do to help you better manage your credit profile, and increase your credit scores through purposeful planning and strategic spending.
Opt Out Pre-Screen
The last thing I want to leave you with is a free tool that will opt you out of credit card offers through the mail, email and by phone. By opting out of these “pre-screened” offers, you should see an immediate boost of 3-5 points.
Best Practice: Go to www.OptOutPreScreen.com and stop credit card companes from pulling your credit without your permission!
I know it’s not anything to write home about, but in some cases it can mean thousands in closing costs or loan options.
Credit Questions and Comments
After many years guiding home buyers through credit challenges, I can tell you that experience counts. I’ve answered many questions from folks that got bad advice from an inexperienced loan officer, and it cost them money and time!
Feel free to shoot us an email , give us a call, or ask your question below so that others can benefit.