Recently on the REALLY Community section, a realtor named Jacqueline Kraszewski from Green Team Home Selling System posted a question about credit scores. She asked, “ What information do you give potential buyers about raising their credit score”? That got us to thinking… What are some ways to help our buyers understand more about the ins-and-outs of credit scores?
Some buyers come to the table with a ton of knowledge on home-buying and credit and some can come to you knowing absolutely nothing; we’ve all had a client that knows very little about the process and it’s our job to support them through that. In order for buyers to learn how to affect their credit scores, they first have to understand how its created.
In a collection of posts by Time, Inc. called Money 101, experts give a thorough overview and advice on all things related to that elusive FICO score under the section “Managing Credit and Debt.” Fair Isaac (and Company) are the makers of the credit score also known as a FICO score. They don’t share their exact formula for your credit score, but they do give the weights of various criteria that they look at: 35% payment history, 30% amount owed, 15% length of history, 10% new credit, 10% types of credit used. Credit scores can range from 300 to 850, 850 being perfect credit. According to Value Penguin.com, the average credit score in the United States is a 695. Although this is an all-time high, to receive the best rates, one’s credit should be at 740 or above.
So, what are some simple ways for buyers to raise their credit scores? We came up with two of the most pertinent factors: (1) Be on time, and (2) Reduce Credit Utilization:
1) Be On Time:
Be sure that bills are current. We all know that we should pay bills on time, however, people make mistakes, miss payments, or are late on payments. Even small, periodic lapses can be reported. According to Heather Battison, Vice President and TransUnion, “missing any form of payment can have a negative impact on your credit score and can pose a potential risk to lenders — whether it be from a credit card or a loan. That is why it is imperative to pay off debts on time and in full each month.”
So, in order to boost their credit score, buyers should try their best to stay current and on time. Creditors often do not report missed payments until thirty days after the missed payment, so even if buyers are late, they should not think all is lost — they should pay as soon as they can. MyFICO.com also reports that “the longer you pay your bills on time after being late, the more your FICO Scores should increase. Older credit problems count for less, so poor credit performance won’t haunt you forever. The impact of past credit problems on your FICO Scores fades as time passes and as recent good payment patterns show up on your credit report. And good FICO Scores weigh any credit problems against the positive information that says you’re managing your credit well.” The moral of this story? Pay on time, even after thirty days, buyers can receive an increase in their credit score.
2) Reduce Credit Utilization:
Considering that FICO scores lean heavily on amount owed, finding ways to shrink that amount will help raise credit scores. This, subsequently, will allow for buyers to receive better rates from mortgage lenders. There are several ways that any person can achieve a better credit utilization — the ratio of your credit card balances to credit limits.
- Pay off debt. In this particular area, the best thing a buyer can do is to pay down his or her revolving credit card debt. Please note that buyers should not be encouraged to clear one credit card with another credit card to spontaneously improve credit — that does not work.
- Keep balances low on credit cards.
- Do not close or open new credit cards. Having the same amount of money outstanding and having fewer accounts can lower your score. Asking for more credit is a credit inquiry, which negatively affects your credit score. Additionally, opening new lines of credit can also be a red flag to some mortgage lenders, as well, giving them the impression that you are in dire need of money.
These main areas are the ones buyers should most concentrate on due to the weight they receive when computing FICO scores. There are no overnight credit miracles, but a solid few months can do wonders to help a buyer best affect his or her credit.