Every credit bureau uses its own criteria, so what makes for a better score with one may not affect your score with another. While getting an inaccurate judgment removed from your report can boost your score dramatically, most changes will not happen overnight. And you never know which direction your score can take if you make changes, so tread cautiously. Update: There is software available through some credit agency affiliates called Credit Expert. Some mortgage brokers have access to this on credit reports they pull for potential clients. Credit Expert scans your report and can predict a potential credit score increase and guide you on what changes you can make to immediately improve your credit score.
Reduce Debt: Paying down debt not only saves you money in interest charges, but it can improve your score if you appear overextended. Ironically, you may score better if you have small balances than if you have none at all. So one strategy is to use your credit cards from time to time, then pay the bill in full to avoid debt while keeping them active.
Get a Good Mix of Credit: Ideally, you’ll probably want at least a couple of major credit cards, a department-store card or two, and maybe an installment loan like a student loan or auto loan. Just don’t rush out an open a bunch of new accounts at once. You’ll end up with too many inquiries and too many new accounts. Also, don’t feel you have to run up debt—just use the cards for things you’d normally buy, then pay your balances in full. Still, if you shun credit, you might want to add a couple more over time.
Up Your Credit Limits: Add up all your credit limits and your total debt on your revolving accounts, as shown on your credit report. Are you “utilizing” more than 50 percent of your total credit limits? Then look at each individual revolving account to determine the same thing. If you are using a lot of your available credit, you may want to pay down your debt—or if that’s not possible, increase your credit limits—to bring that ratio down. (Note that scoring systems may ignore revolving accounts with very high balances—$25,000, for example—to weed out home equity lines in this calculation.)
Establish Positive References: If your credit is damaged due to past problems, understand that time does heal the wounds. Resolve to make all your payments on time from here on out, and establish new, positive references. Get a secured card if you don’t have a major credit card already.
Get a Checking and Savings Account: Most lenders want to see that you have both, and they don’t care how much money you have in them unless you are applying for a mortgage.
What Won’t Help
Closing All Your Old Accounts: Traditional wisdom has said you should close out accounts you don’t use anymore. But this may actually have a negative effect on your credit report score by shortening the average length of your credit history (if you close out your older accounts), and by reducing a positive mix of credit, if the system is only evaluating open accounts. If you want to close accounts, close newer accounts first, do so slowly (maybe one every couple of months) and tell the issuers to report the accounts to the bureaus as “closed by consumer.” By law, they must do so upon request.
Closing Negative Accounts: Contrary to popular belief, paying off and closing an account does not remove it from your credit report. In fact, there’s not much you can do to remove accurate but negative accounts from your report. Still, paying off a collection account or other negative listing can help your credit if the scoring system looks at whether these items have been satisfied. Negative information generally can remain on your credit report for up to seven years—ten in the case of bankruptcy.
Paying Late: Of course, you know you’re not supposed to pay late, but it’s not uncommon for consumers to pay their student loans, auto loans, or mortgages after the due date but before the late payment kicks in. Sometimes those late payments are not reported to the credit bureaus, sometimes they are. If you apply for a new mortgage or a refinance, however, and you’ve been paying your current mortgage after the due date, you may not get the loan you want.
In addition, if you do fall behind, it doesn’t really help to make a large payment later to “make up for it.” The fact that you were late will still be reported to the credit reporting agency and affect your credit score.
Cosigning: Of all the credit problems I hear about, cosigning is one of the most common. Loans you’ve cosigned for someone else will appear on your credit report and be treated as if they are your own. (You did agree to be responsible for them when you cosigned.) If the car you cosigned for is repossessed, the student loan goes into default, or the credit card is maxed out, that will be your problem, too. And until the debt is satisfied or the legal time period for reporting that information elapses, don’t count on a whole lot of sympathy from the lender—or other lenders for that matter.
Falling Behind on Child Support: This is a big red flag to lenders. Not only do lenders consider failure to pay child support a sign of financial irresponsibility, but they also stay away from these applicants because child-support payments take precedence over other consumer loans in bankruptcy court.
Finance Company Loans: In the past, people were warned about taking out loans with finance companies because they can often count against you, even if you made every single payment on time. The theory behind it was that finance companies have traditionally been considered the lender of last resort, and if you had to get a loan there you must not be a very good risk.
Now, of course, credit-scoring systems evaluate which factors are risky, and finance company loans aren’t always the lender of last resort anymore. Large, legitimate companies like The Associates and Household Finance are making loans to lots of different types of customers. Auto finance companies like GMAC or Ford Motor Credit sell the convenience of on-the-spot financing. That means that it’s getting harder for lenders to determine that a category like finance company loans is negative.
Still, some scoring systems will count against a finance company loan, and in a judgmental system, a lender may or may not take it into consideration, depending on where you got the loan. My feeling is that you want to steer clear of the sleazy-type finance companies anyway because of what their loans will end up costing you. As long as you do that, a loan from a legitimate finance company shouldn’t be a problem.
Filing Bankruptcy is usually considered the most negative mark on a credit file. A bankruptcy remains on your credit file for ten years from the date you filed for Chapter 7 (straight bankruptcy) or seven years from the date you filed a Chapter 13 (where some debts are partially repaid). In general, both kinds of bankruptcy harm the file equally—in other words, most lenders will not give you a higher rating for having repaid your debts through Chapter 13. Your credit report may also list each separate account that was discharged through bankruptcy for up to seven years. If you filed for bankruptcy but then did not go through with it, the fact that you filed will also be reported, and your credit record will still be damaged.
Earning More: Whether you are applying for a mortgage, car loan, or credit cards, your income might be a factor in determining how much credit you’ll get, but that won’t always offset a negative credit history. Each card issuer will have a minimum income requirement that can be as low as $10,000, or in the case of most gold-card issuers, as high as $35,000. Some card issuers will reveal their minimum income requirement; others won’t.
Issuers don’t always confirm employment. If you are self-employed, you may be required to provide tax returns or other proof of income. Some issuers, instead of simply looking at your income, look at your income per dependent. If so, the application will ask for information about your dependents.
A high income usually won’t make up for a poor credit record. I’ve heard from people who say (indignantly), “I had some credit troubles in the past and was behind on several bills. I am all caught up now and make a zillion dollars—why can’t I get a major credit card?” In credit card lending, income is usually closely related to your other debts and your credit history. If you have a good credit record, a high income will likely enable you to get a higher credit line. Having a very high income, on the other hand, often will not compensate for bad credit or no credit record.
Are You Who You Say You Are?
Lenders are also constantly on the lookout for credit fraud. Crooks make off with millions of dollars every year by pretending to be someone or something they aren’t. When it comes to application fraud, there are a few flags that alert lenders to the possibility that an application isn’t on the up and up. They include:
Post office box addresses (especially if you don’t live in a rural area). Some credit bureaus have systems that also catch addresses of prisons, mail drops, or commercial addresses. In addition, a credit granter may be suspicious if the same address appears several times on an application—your home address is the same as your work address, for example; or if the zip code you list doesn’t match the address.
Social Security number discrepancy between the Social Security number you provide on the application and the one listed on your credit report. Credit bureaus also frequently search other files to make sure you aren’t using someone else’s Social Security number, to check if the number belongs to someone who is dead, and to make sure the number given is a valid number.
A conflict in the address or employment you listed on your application can raise suspicions, although in general, credit granters do not give a great deal of weight to employment information or addresses on credit reports, since they are so often out of date or incorrect. I’ve been told that some 30 to 40 percent of credit card issuers verify employment directly with employers—the rest do so on a case-by-case basis.
Inaccurate bank account numbers. Fraudulent applications frequently do not have accurate checking and savings account numbers listed. In some cases, the accounts are opened shortly before applying for loans, to make the lender believe that the thief is financially stable. Account numbers on credit account references may also be double-checked for validity.
Some fraud-detection systems are quite sophisticated. For instance, listing on your application that you were hired on a date that turns out to be a Saturday or Sunday could raise an eyebrow with a creditor. So could an application or credit file that lists your home address in New York for ten years, but your work address five years ago in Virginia. Zip codes for employers and previous addresses may also be checked and verified to make sure they are correct.
To prevent creditors from rejecting your applications based on potential credit fraud, make sure you fill out the application completely and accurately. It is also a good idea to keep copies of your completed applications to help you fill out new applications consistently and completely.
If you’re really interested in this topic of credit scoring, I’ll give you some more details here on how it can affect your financial future. If you’ve read enough already, just skip ahead to the next chapter.