AL and FL Mortgage News

Opinion - How to Build, Re-build and Maintain High Credit Scores

October 24th, 2017 10:34 AM by Devin Murray


Over the years we have seen thousands of credit reports from the best to the very worst-case scenarios and the most commonly asked question when discussing scores is something to the effect of, “How can I get my credit scores higher to buy a house, refinance, build, renovate, etc.?” No, this is not a sexy topic but what is sexy are the relatively fast results for people who dedicate a little effort to understanding a few basics and then start building, rebuilding, and maintaining their credit.  The good news is you don’t need to understand credit algorithms or what those words mean to achieve results.  Our intent here is not to answer all things credit nor is it to offer you credit counseling services* but we do want to shed light on some proven best practices, let you discover where you are in that path towards better credit, and ultimately act towards making credit the excellent resource it can be for your future.   

Get Added as an Authorized User
If you don’t know your credit scores you can get your scores from various online companies like FreeScoreOnline.com but we frequently recommend going directly to the 3 major credit bureaus Equifax, Experian, Transunion who determine your credit scores.  Credit scores commonly report in a range around 450 to 820 with a higher number being "better" than lower.  If you find you don’t have a score for all three bureaus, maybe you have only one or two scores due to lack of credit or your middle of the 3 scores are below 640, one of the single fastest ways to re-establish and build new credit is to use someone’s else’s credit.  Yes this is legal if you have permission.  Yes this has risks involved you need to look into.  Do you have a parent, sibling, or significant other who has had a credit card that has been open for at least 12-24+ months, who keeps balance is kept below 50% of the limit, and always pays it on time religiously?  If the answer is yes and they agree to let you, the owner of that account can add you as authorized user with a quick phone call and as soon as the creditor reports that next month’s data it can dramatically and immediately impact your score inside of 30 days. 

Be careful if that person and anyone else on the account decides to take up gambling, rack up the bill at Christmas, or make a late payment because getting added as authorized user can cause just as much damage to your credit history and scores as it can good.  Also there are other implications regarding access to this person’s credit you need to research and discuss but this is why we recommend using family over a friend to do this.  Once you follow the steps below and have several (at least two if not three) of your own credit accounts that are in good standing, it would be a good idea to remove yourself as a user within a year or two to eliminate any potential bad data being reported.

Secured Lines of Credit -  The Stepping Stones
In the early stages of credit building or rebuilding, getting added as an authorized user might be your starting point or If you don’t have this luxury, there are alternatives.  We don’t want to tell you how to live your life but if you can stop eating out for a few weeks, pick-up a few extra hours at work, do Uber or Lyft, or curb your online shopping could you find a way to save $500?  With the first $500 you save you need to open at least one secured line of credit that reports to at least two major bureaus.  A secured credit card is secured because of the collateral you put forth to open it.  Regular unsecured credit is extended because of your good scores already established.

It is really important to know that many providers of secured lines claim to “report information about your account to the major bureaus” but frequently take many months to report, don’t ever report, only report to a single bureau, have high rates and/or high fees, and have poor customer service but also know the name of this game with secured lines is reporting to at least two bureaus quickly so do your research here. Credit Karma has just two cards with First Progress claim to report to all three.  NerdWallet has a similar pros and cons review but doesn’t make bureau reporting a focus.  Magnify Money’s review focuses on those with low annual fees.  Wallet Hub has a very detailed review that is also worth checking into.

After nearly 7 years of repeatedly recommending mutual customers and positive results, we have found PNC Bank (888-370-7344) offers a nearly hassle free $500 secured line of credit with competitive terms and fees.  You fill-out an application online or in a branch, deposit the $500, and then they report the usage data to two bureaus in 45 days or less. We have no affiliation with PNC Bank but we have seen customers open a $500 line of credit, pay it on time monthly, keep the balance below $100, and see 60+ point increases inside of a few short months people with little credit from just a single account which is massive.  Your personal results in a similar time frame may vary based on your credit profile.

Multiple Secured Lines of Credit
Keeping in mind the potential gains of opening a single account, if you can open a second secured line with this same or a different provider do so as soon as possible.  If you can, consider a larger limit if possible because it looks more favorable when a human is making a credit decision in the future.  If you can’t afford it, a second for another $500 is fine.  The goal with respect to scores is to have more than one account reporting positive information so it is better to have two $500 secured lines reporting compared to say one single line of $1,000.   Secured lines are essential stepping stones for credit building and should be kept open for as long as possible.  Once you build a credit profile within say 24 months by opening other accounts like unsecured cards, installment loans, and other types of credit you may only then want to consider closing them.  

The Credit Union - Getting a Third “Major” Trade-line
Keeping all else equal, everything described so far can and usually does build/improve existing credit within a 6-month time frame for an investment of around $1,000. (We say investment because when you close the secured line and it is paid in full you can get your money back.)   Around this 6-month mark with one or two secured lines, make a credit goal to get a third “major” trade-line established.  Some would argue the figure to be higher but have a goal of at least $2,500.  You can open a third secured line as previously described but at this point you may want to purchase something using the credit you are building even if you have the cash to buy it outright.  Find out what is best for you.   

To take this next step we most frequently recommend checking first with a local credit union over any bank big or small on what they offer.  We aren’t bank haters but credit unions by design will lend to people with scores below 600 with a minimal down payment and in many cases, offer better terms to those with higher scores like 700-760. Regardless of who you choose, “major” credit accounts like auto loans are secured by the collateral (less risk) and are therefore typically easier to get approved for than say opening a credit card which is unsecured (greater risk).  We are not suggesting you have to go into debt to get better credit because you do not but having a third account/trade-line is a worthy benchmark in the credit world.  

Inquiries 
So far we have talked about things that will increase your scores so we also need to talk about things to avoid.  It would be pointless to follow this or any similar path for credit building and let potential creditors hammer your credit with inquiries.  We see even people with "good" credit do this all the time.  As a rule moving forward from today only authorize a few potential creditors pull your credit per year.  Tell your friends and family this information.  You can increase your chances of obtaining new credit by using credit unions who have more flexible guidelines which will naturally lead to less inquires. Multiple inquires, which we will label six or more per year, very frequently causes damage to credit scores without consumers even knowing.  You can always pull your own credit as mentioned previously without an inquiry “counting” against you so before you authorize anyone at all, go online to a local credit union and see what the minimum score requirements are before ever applying and save yourself time.  Note that credit unions also typically publish this information openly while banks do not.  

Dealer Inquiries
Not all car dealerships are evil but NEVER let a car dealership of any kind pull your credit.  Hands down.  Know your score and get credit pre-approved to purchase a car or truck at your credit union or bank first and then go car shopping knowing what you can do.  This same concept applies to mortgages.

New vs. Old Gear
How you use your credit will affect what you can afford today and in the future so a quick discussion about new versus used is highly relevant.  New cars, boats, four-wheelers, Wave-Runners, and other similar personal recreational merchandise can be tons of fun and might impress others but the shine eventually fades.  Most importantly the new stuff also loses significant value rapidly and ultimately getting rid of this stuff to buy more new stuff will cost you more and may not be possible when you are ready if you find yourself in a negative equity position.  The value of pre-owned and certified cars, trucks, and the like is literally better than ever and can be a huge value to you because the other person who bought it first took the massive depreciation hit for you.  This most certainly holds true for gently used luxury items. 
     
Rent
If you can’t get a third tradeline as mentioned above you may need to wait for your score to heal with time or try some other methods below.  Another helpful tip that doesn’t impact your credit score but is a valuable tip is making sure you pay your rent via online bill-pay or use a check.  For mortgage credit, FHA will allow proof of 12 months canceled rent checks as a third tradeline.  In some cases, if you apply for a loan and have a 640 credit score, they will sometimes require 12 months proof of rent so if your score is lower than this point now form a paper trail now.  It is impossible to form said paper trail if you pay with cash.    

Ramping Up Scores – Debt-to-Limit
How you use credit is what really determines your score.  Aside from making on-time monthly payments, a factor largely unknown to the public is something called a debt-to-limit ratio which is expressed in a percentage.  Do you have a credit card or other revolving account where your balance is 50%, 75%, 90% or more of your limit?  If your answer is yes, work on reducing the balances on the account(s) with the highest debt-to-limit ratio immediately.  This sounds backwards because you may be paying more interest on a card with a higher balance but addressing debt-to-limit issues with your credit is more relevant to credit scores versus the cost of the debt.  

Limit Increases
If you have “good” credit (say 680-700+), have any single account that has been opened for 6-12 months with a balance less than 50% of the limit? Most creditors will allow you to increase your limit on these types of account just by clicking a button.  Most of the times it does not result in a harmful credit inquiry and the results are almost always automated.  If granted this results in an immediate reduction of your debt-to-limit ratio for that account and effortless credit score building on your part.  In most cases if you have paid the bill by the due date each month out of the last 12 they will allow it.  If you are denied you have not lost anything and try again in a few months of satisfactory usage.

Balance Transfers
If you have established credit with more than 3 or 4 credit cards you need to research information about balance transfers to decrease higher interest cards and to continue to hammer down your debt-to-limit percentages.  Know that most unsecured credit card offers with balance transfer incentives have a threshold of 700+.  For example some credit card providers offer 0% interest on transfers with credit above 720+ for 12 months or might give you 18 months if your score is above 740.

Low and Bad Credit
We have talked about several ways to add positive credit, skills to better manage it, and easy tips to boost credit but we haven’t talked about dealing with existing negative information impacting your credit today.  This is no better way to say WAKE-UP.  Realize the past is the past, take ownership of your credit, and stop hiding.  Contact any open accounts that you have any late payments still owed on and establish a dialog as quickly as possible to bring any late payments current.  Explain your circumstances and ask if they will work out an agreement to help you do this.  Even if they decline, have terrible customer service or were somehow rude to you at any point you not living up to your part of the agreement is not their fault. Their job is to collect money for their company so the bottom line is be ready to clean up your mess.  If you are still pointing fingers, you are not ready.

Old vs. New Collections
If you have a late account(s) that was not paid after 120 days many creditors “charge-off” the bad debt and sell your debt to a third party collector to get it off their balance sheet.  Yes, collections can be tough to deal with but if you have any collections added to your credit within the last 12 months these are what the credit world considers as “newer” collections and you should try to pay them off in full as quickly as possible.  Having these kinds of collections reporting has already harmed your credit but is likely still being reported in recent activity.  

Newer collections have less side effects on credit when compared to “older” collections that have been on your credit for a year and beyond and/or haven’t updated reporting for many months.  Many people avoid paying off old, higher balance collections because the balance is so high they still don’t have the money to pay them back or ignore the small, old accounts but they all matter.  For credit rebuilding old collections need to be resolved just as the new but it is important to know that resolving old collections will unfortunately harm your credit more in the short term when you pay them off or settle for less than what you owe.  

Third party debt consolidation is a multi-billion dollar industry that you should probably avoid getting involved yes even if you owe thousands in old collections.  These companies contact your creditors, negotiate a settlement balance and corresponding payment plan and charge you a monthly fee for this service meaning it will take you longer to actually pay off the debt compared to doing it yourself.  What the masses don’t know you can do this yourself if you want to and skip the fees but a payment plan is not the best idea for credit score improvement.  Think of a payment plan on collections like a long/drawn-out breakup or slowly ripping off a Band-Aid on a wound that might not be that bad to begin with. 

As a payment plan alternative, a settlement and single lump sum payment will improve your credit quicker especially if you are building new credit simultaneously and you should be.  As scary as a settlement sounds most people don’t know that collectors are most always pre-authorized to settle their accounts for about 10%-50% of the final charge off balance if you simply call and negotiate it.  Note that if you settle with either method your credit report will most likely be marked accordingly.  Also know that your collectors will typically require the settlement payment within 10-30 days so don't call them to negotiate if you aren't ready to do something.  You will need to demand the terms of the settlement in writing and make sure it indicates that whatever you end up settling for will "satisfy" and "close" the account.  If they say they can’t give it to you in writing or they will mail it to you, tell them you can’t pay until they actually do.

Lump sum settlements on old collections are more harmful to your credit in the short term but are better in the long term when compared to a settlement with monthly payments over 12-60 months that debt consolidation companies prefer.  A payment plan omay be the only alternative for you and would be preferable to doing nothing.

Bankruptcy
Despite what is portrayed online and via TV, Chapter 13 and 7 personal bankruptcy are not the end of the world for your credit.  In fact many people are probably good candidates and don't take use of these tools which offer protection and a much-needed fresh start when they can’t possibly settle a large amount of derogatory accounts with respect to available income or assets.  If you have a discharged bankruptcy within the last few years or as soon as the last few months, you need a request a copy of discharge paperwork from your attorney, keep it on file for at least 7 years and pull a copy of your credit report.  You can your scores from companies like FreeScoreOnline.com but once again we recommend going directly to the bureaus Equifax, Experian,  Transunion so you can question/request their report directly from them as well as submit corrections online.   

With your bankruptcy discharge paperwork and credit report in hand, make sure all debts that were discharged in the bankruptcy show a $0 balance and/or are marked as discharged by the bankruptcy.  By law the bureaus have 30 days to respond to your request to any corrections and you can supply the discharge directly to the bureau if needed.  In many cases most people do not take this final step after the bankruptcy ultimately find their credit scores suppressed for no reason other than lack of understanding and due diligence.  For those who are on the ball, it is common to see 700 credit scores in just a few months after bankruptcy.

Foreclosures

If you are facing foreclosure, attempting to negotiate a short sale with your lender or attempting a deed-in-lieu by surrendering the title to the home is better (with respect to mortgage credit guidelines) with regards to a regular full foreclosure.  If you are facing foreclosure, it might be wise to contact a licensed attorney to discuss including the option of including foreclosure inside of the bankruptcy because this has less wait times with respect to future home buying/financing in some cases.

If you have had a foreclosure and or bankruptcy in the past both are termed recent “derogatory events” with respect to credit.  In 2017 the general trend is that you can establish new credit using methods described here and even get mortgage financing literally within days after these kinds of events rather than 4-7 year wait times required by FHA and conventional loans. To qualify on mortgages after a derogatory even you will typically need 10-20% down to qualify.

Disputes
Credit disputes in light of credit scores are largely intended to be used to resolve false/incorrect information or fraud within a relatively short window of time.  Typically, any bad data on a disputed account keeps that data from impacting the score while the account is in a dispute status but by no means is opening a dispute any kind of long term solution for improving your credit score nor settling a debt.  Many creditors will require you to take any and all accounts out of disputed status in order to extend new credit.  If you are worried about fraud and someone stealing your identity you might want to look into products like LifeLock or MyIdCare.com

Liens/Judgements
Liens and judgments can sometimes be settled if the other party agrees to a settlement but are not as easily handled like a collection because the government is involved requiring payment before new credit can be established.  Liens and judgements in the credit world do impact credit and are a higher priority than collections of any kind so they too should be dealt with as soon as possible.  If you have one or more of these you may want to inquire with a secured card provider to see if these will cause an issue.   

Summary 
Building and maintaining credit is cyclical rather than linear path.  Good credit can be a reality if you first take responsibility and take steps like those mentioned here in establishing new credit, make timely regular payments, keep revolving balances low, pay-off/settle collections and charge-offs quickly, and monitor your credit annually.

If you want to inquire about guidelines regarding various types of mortgages and credit requirements you can check our other blog posts, email, or call us at 888-269-8335 during normal business hours.  As always you can apply online 24 hours a day.

*The viewpoint of the post is the solely the opinion and experience of the author and not Gulf States Financial, LLC.  Gulf States Financial nor the author is in any way a licensed credit counselor or bankruptcy attorneys and your scenario might warrant a consultation with a licensed professional.  We do not offer this information for any form of direct compensation, so do your research and verify what we are saying and what might be best for you.  This information is subject to change at any time.

 


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