Credit Repair, Building Your Credit Score

BUILDING YOUR CREDIT SCORE
by James Robert Deal
Commercial Mortgage Broker and Real Estate Attorney

I do not engage in "credit repair" for a fee.

However, some of the basics about how to build your credit score are well known, and I can point these out and help you to manage your credit wisely and build your credit score. I do not charge for discussing such issues with you.

The precise factors used by the three credit reporting agencies to calculate your score are deep secrets. However, some generalizations can be made about how to improve your scores. Remember, these are only generalizations.

If you want a mortgage, you have to have credit and use credit. Don't come to me applying for a mortgage and tell me you have no credit cards. I will ask you why, and you will say: "I prefer to pay cash." Then I'm going to tell you: "Well, buy the house all-cash."

Scores range from 300 to 850. Generally, a person with a credit score of 620 who can pay at least 10 percent down can get good conventional rates, provided he has no recent bankruptcy or foreclosure, and provided he can go "full-doc," which means proving his income with W-2s or tax returns. In the past a person with a score down to 660 could get a "stated income" loan with only a slightly higher interest rate than if he went "full-doc," provided he had been self-employed for at least two years and could prove it with tax returns or a business license. Stated income loans are now rare, although they will come back, but with limitations, such as requiring a significant down payment.

A generalization: The most important credit scoring factor is making payments on time. Around 35% of your score comes from payment history.

Nothing knocks a credit score down quite so much as a late mortgage payment. A late mortgage payment is even worse than a bankruptcy or a tax lien. One late payment can reduce your score perhaps 100 points. You are asking a lender to make you a loan, but if you have not paid your current mortgage on time, your new lender will have little confidence that you will pay him on time. Further, if you pay your mortgage late, the resale value of your loan on the secondary market will be reduced. Lenders sell most loans, so they don't like you when you make payments late.

Only slightly less important is paying your credit card, car, and other installment loans on time. One late payment on a credit card can impact your score perhaps 50 points.

Don’t wait for the statement to arrive to remind you to make the payment. Statements get lost in the mail. You are responsible for the payment even if the statement never reaches you. "I didn't get the bill," is not an excuse. The credit card company will say, "You should have known it was due and called to inquire." Receive your credit card statement by e-mail.

Pay your mortgage electronically. Checks can get lost or delayed. Your credit score will go in the tank. You will not be able to refinance and get a better loan and will be stuck with your high interest rate loan for years to come.

Set up an automatic minimum payment that will always get paid electronically every month. If you slip up and fail to make a payment, it will be made for you automatically. Then make extra payments when ever you can afford to do so.

Arrange for automatic overdraft protection for your main checking account. Then if you fail to make a deposit or deposit money to the wrong account, there will always be enough money in your main account to cover your automatic payments on your mortgage, credit cards, and car payment. It’s well worth the annual fee plus the fee for each overdraft.

The amount you owe ("numerator") as a ratio of your total credit available ("denominator") counts for around 30% of your score. This applies to each credit card and car payment and to your entire line of credit combined.

Keep the balance on each credit card below 30 to 50 percent of the card limit. If you are over 30 to 50 percent of your credit limit, pay the card down. Or ask the credit card company to increase your credit limit. Or accept a balance transfer offer from another credit card company and move part of the balance to another card.

Some people turn down new credit card offers. This can be a mistake. Having lots of credit available, as long as balances are low or zero, can actually boost your score, because it increases the total size of your line of credit. It increases the "denominator" and thus reduces the ratio of what you owe to your total available of credit.

Use each card once every few months to buy a meal or pay for gas. A card must be used at least occasionally for it to count as credit available.

I know investors who have used their $20,000 credit cards to make down payments on rental houses or to pay for upgrades on their "fixers." They finish the work, sell the house or refinance it and get their money back plus a profit. And they pay off their credit cards in full.

If you own your home and one or more rental properties, after a few years you will have equity in them. You will be able to draw on the equity in your property and pay off your credit cards and use your real estate lines of credit instead of your credit card lines of credit. Owing money on secured lines of credit has less negative impact on your credit score than does owing money on credit cards.

One of the rewards of having a high credit scores is that when you pay your credit card down to zero, the company you paid off will offer you zero or low interest for extended periods of time. There is nothing wrong with accepting these offers and moving balances from one card to another. When the interest rate on your credit cards is 2.99 and the rate on your HELOC is 8.5, it makes sense to move real estate debt to your credit cards.

You should have cash reserves, and you should have equity in real estate that you can draw on. But sometimes you don't. If you lose your job, and if your reserves are low, you will soon be late paying your mortgage, your credit cards, and your car payment. Your credit score will plummet. Your credit card companies will jack up your interest rate. Your house will go into foreclosure.

However, if you have several $20,000 credit card with zero balances on them, you will be able to use them to keep current on your obligations until you find the next job or get out of your sick bed. If you have extra credit, you will be able to survive longer and not have to take just any job. You will sleep a little better at night.

A lot of businesses and individuals fail not because they are unworthy but because they are not deeply capitalized and do not have a big enough line of credit to draw on. The credit card is the little guy's line of credit. If you have untapped cards ready to draw on, you will have a lot more room for error.

If you have lines of credit available on credit cards, you will have money to relocate to a different city if you have to. Moving is frightfully expensive.

If you have extra credit card capital to call on, you might, if you lose your job or get sick, be able to weather the storm and avoid bankruptcy. Avoid bankruptcy if there is any, any, any reasonable way to do so.

Business credit cards are available. The rates are higher than on personal credit cards, but they are not unreasonable. Business credit cards differ from personal credit cards in that they do not allow for cash advances or balance transfers, although even this rule is not absolute. Business cards can generally only be used to buy equipment or pay for services. Business credit cards are replacing traditional bank loans to small businesses.

Regarding old collections: Don’t assume you should pay them off. After several years old collections have a negligible impact on your credit score. If you pay one off, it returns to the top of your credit report, and it has a negative impact on your score in the short term. Prime lenders sometimes insist that you pay off all collections as a precondition to getting a loan from them. So too does FHA. Sub-prime lenders do not require this. It is less likely that lenders will require that you pay off medical collections. There seems to be an awareness among lenders that our medical insurance system is defective.

All lenders require that you pay off judgments and tax liens, because at closing they will jump onto title and will have priority position ahead of your new mortgage.

If you do pay off a collection or judgment, bargain with the collection agent. In return for payment get a letter on the collection agent’s letterhead which states that the debt was based on a misunderstanding (if it was), that it is fully satisfied (even if you paid less than the full amount owing), and that it never should have been sent to collection in the first place (if this is true). This letter can be sent to each of the three credit reporting agencies, and the item will be completely removed from your credit report. This can take up to two months.

If you are in a hurry to close a loan, I can use such a letter from a creditor to do a Rapid Rescore, in which I fax that letter to my credit reporting agency. Your score is recalculated immediately. This service is costly, but it works.

If there are errors on your credit report, write a letter to the three credit reporting agencies. They are required by law to communicate with the company which posted the error to your record.

Go online and order your credit report regularly. The addresses and phone numbers for all your creditors will be found at the end of the report.

Another generalization: How long you have had credit counts for around 15% of your score.

Another generalization: The type of credit you have counts for around 10% of your score. A department store credit card, secured credit card, or finance company loan (Beneficial or HFC) is less favorable than a regular credit card.

Another generalization: Recent applications for a lot of new credit counts for around 10% of your score. When you go shopping for a car, dealers will send your loan application to a dozen lenders, and they will all pull your credit. Your score will go down. BUT visiting several mortgage lenders and having them pull your credit will have no negative effect on your score. You are buying a major asset, and it is understood that you need to shop around.

Some borrowers naively presume that not having credit cards or closing most or all credit cards will improve their credit score. To the contrary, a mortgage company can only judge your ability to make timely mortgage payments to looking at how timely you make payments on your credit cards and car. Do not close out your credit cards. Pay them off and keep them. Use them every few months, and pay the balance in full when possible.

There are enormous privileges that come with having a high credit score. Use credit wisely. Guard your credit score carefully.

Call me at 425-774-6611 or 888-999-2022 for further information. Or e-mail me. The fax number is 425-776-8081. Click here to sign up for my e-mail newsletters.

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