How to Increase a Credit Score
Credit scores are one of the most significant factors lenders use to evaluate whether or not to lend money to a borrower.
When buying a home, few things are more vital than your credit score.
Credit scores are designed to measure the risk of defaulting by considering various factors in a person’s financial history.
If you are considering purchasing a Massachusetts home, one of the things you want to be sure of is the accuracy of your credit report.
One of the most popular mortgage questions among home buyers is what credit score is needed to buy a house.
You need good credit scores to get the best mortgage deal.
The Mortgage Industry Changed After The Last Real Estate Downturn
If you ask any mortgage broker, they will tell you that things have changed in the mortgage industry monthly. Due to the increase in foreclosures and short sales back years ago, lenders have increased their standards when evaluating the potential for default of every borrower.
One of the tools that lenders use to evaluate the borrower to repay a loan is what’s known as their FICO score. The Fair Issac Corporation developed the FICO score.
The company was founded in 1956, and its scoring programs are often used to assist lenders in managing credit accounts, detecting credit fraud, and automating lending decisions.
The FICO score is a standardized approach that helps lenders efficiently deliver loan decisions.
FICO scores range from 300 to 850, with 850 being the maximum possible score. According to the FICO scoring system, five factors determine a borrower’s score.
Using these guidelines can help you improve your credit score! Doing so will put you in a much better financial position to purchase a home.
Your Payment History
- 35% — A borrower’s payment history carries the most weight – Late payments on bills, including a mortgage, credit card, or automobile loan, can cause a consumer’s FICO score to decline. Paying your bills according to the contract you signed will, over time, help improve a consumer’s FICO score.
- 30% — The borrower’s credit utilization – The ratio of current outstanding debts, such as credit card balances, to the total available revolving credit ( your credit limit). You can improve your FICO score by paying off debts and lowering your utilization ratio. Closing existing revolving accounts will typically adversely affect this ratio and harm your FICO score.
Your Credit History Length
- 15% — The length of credit history – As your credit history gets longer, assuming you pay your bills on time, it can positively impact your FICO score.
Types of Credit
- 10% — The types of credit used (installment, revolving, or consumer finance) – There is some credit given to having a history of managing different types of credit.
- 10% — A recent search for credit or amount of credit obtained recently– If you have multiple credit inquiries as a consumer seeking to open new credit, such as credit cards, retail store accounts, or personal loans, it can hurt your score. Applying for lots of new credit in a short period is also viewed as risky and can cause a drop in an individual’s score. What should be noted, however, is that if you are shopping for a mortgage or auto loan over a short period, you should not experience a decrease in your scores due to these types of inquiries. So if you are buying a home and apply to multiple lenders and they all do their credit checks, you are not supposed to be penalized.
What FICO Scores Do Not Consider
FICO scores do not consider a borrower’s salary, employment history, where they work, rental agreements, child support, or other such obligations or interest rates on any current loans.
Generally speaking, a credit score over 720 is often considered excellent. A score of 680 – 719 is considered good.
A score that falls between the range of 620-679 will usually make the lender scrutinize the file further.
A score of 585-619 will typically disqualify you from getting the best rates. A score below 584 will make many lenders question whether or not they want to do business with you.
Three companies report credit scores to lenders. They are Equifax, Experion, and Transunion.
The scoring of these agencies can often vary quite a bit. Each of the bureaus collects different information on the borrowers, which can change the final score.
Given how the credit scores can differ from the various agencies, it may be prudent to apply to more than one lender if you fall on the edge of one of the credit ranges.
For example, if you scored 675 at one agency, it is quite possible you could be 700 somewhere else, which could give you a better rate!
Credit Scoring Models Changed
It should be noted that the credit scoring model was slightly altered in 2009 and could affect your score either up or down by 20 points.
The new model will rank credit problems and issues according to number and magnitude more precisely than before. The new FICO scoring system also focuses less on how many accounts a borrower has and more on the amount of balances carried.
The statistical models used for generating credit scores are subject to federal regulation. The Federal Reserve Board’s Regulation B (implementing the Equal Credit Opportunity Act) expressly prohibits a credit-scoring model considering “prohibited biases” such as race, national origin, sex, religion, and marital status.
The law also states that credit-scoring models must be empirical and statistically sound.
In addition, if a borrower is denied a loan based on credit, the lender must state the specific reasons for the denial. A statement that the person did not score high enough is not acceptable.
The reasons for denial must be specific. For example, there were too many late payments of 60 days or longer.
Tips For Improving Your Credit Score
So how does one improve their credit score to get the best rates that lenders offer? The answers are actually pretty simple!
- Pay all of your bills on time every month.
- Pay off all of your existing debt.
- Unused credit cards should not be closed. This can sometimes lower your credit score.
- Do not open a bunch of new credit card accounts in a short time.
- Fix any credit reporting errors.
A few years ago, it was not uncommon to hear mortgage brokers or credit repair companies do what was known as “doctoring” a person’s credit.
A major portion of the FICO credit score is set by the ratio of credit used to the credit limit.
What was happening was they would increase the score by simply increasing your credit limit. For a fee, some credit-repair agencies would report to the credit bureaus that they have opened an account with a high credit limit.
The customer could not use this account, but it would improve the customer’s FICO credit score due to lowering the balance-to-credit-limit ratio. This is no longer allowed!
When you are starting your home search and getting your pre-approval from a lender, one of the other things you should do is get a copy of your credit report from each of the three report bureaus.
As a consumer, you can get one free credit report each year from Equifax, Experion, and TransUnion.
With this knowledge, you should be well-armed to position yourself for the best mortgage rate possible and increase your credit score!
Once your loan is in process, you’ll need to remember to get your mortgage rate locked at the most appropriate time.
About the Author: The above Real Estate information on improving your creditworthiness was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at email@example.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 36+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
Excellent post Bill. Extremly informative. I have one question though. How much are lenders taking in consideration the FICO 08 model for lending in MA?
Judy – I don’t think it really is a question of Massachusetts lenders per say or just lenders in general on what they look for as far as the credit score. I know the models were changed a bit in 2009 if that is what you are implying?
A great post on credit reports, credit scores and how you can “simply” raise your credit scores.
Beth thanks for the compliments on my article about increasing a FICO score to get a better mortgage rate!
This is a really good article on credit. The three credit reporting agencies are Equifax, Experion and Transunion. The scoring of these agencies can often vary quite a bit. Each of the bureaus collects different information on the borrower.
This is great information and a very good resource, especially for first-time homebuyers who want to know how they can boost their credit score.
Thanks Peggy I appreciate the compliments on how to increase a credit score.
Thanks for the great info. I will definitely pass this along!
Great Blog, very informative. The information you gathered is helpful both to first time homebuyers/ homebuyers as well as anyone who is looking to refinance their current home. Over the last years many struggled with their finances. Now that the economy appears to be taking a turn for the bettter, clients are concerned about improving their credit scores and thus their lending power. Thank you Bill, for this great information.
Thanks Claudia. Increasing a credit score is something that every borrower should concentrate on. Having a higher credit score can save you quite a bit of money in better interest rates over the years you have a loan!
Bill, Thanks for the reminder. I was looking over my credit report the other day and thinking that I should drop some of my credit cards I never use, but your post convinced me to keep the accounts open (and just shred the cards). Also, I put a temporary lock on my Equifax credit report, so no one can pull unauthorized inquiries. AT&T just did that and lowered my credit score, took weeks to get them to remove the incorrect inquiry from Equifax.
Another great post about easy ways to improve your credit score! Thanks for sharing. This is the second post on the topic that I’ve bookmarked and will be forwarding to my real estate clients!
Thanks Pete I appreciate your compliments on how to improve a credit score.
Nice article! Great info on how to increase a credit score, I will pass along!
Thanks Bob I appreciate your compliments. Having a good credit score is so important yet may do not think about it until they are in a position to really need a great one!
Great job on the post Bill! This is helpful information to someone wanting to know the how to get that credit score up. I will deff be sending this one along!
Still as timely as when you first posted … Bill, every week I see at least one customer or more who has made recent changes to their credit profile without having any understanding of the impact on their credit score. Just this week I had a customer tell me that they had scores of 785 and 751; only to find that the 785 had become 685. Fortunate for them … they were applying for one of our portfolio products, where we don’t price the loan based on credit score. If they instead had applied for a GSE eligible 30 year fixed … well it would have cost them 2.75 points or a 0.375% increase in rate. Really enjoy your posts … Paul
Thanks Paul. As a Realtor it makes a lot of sense to teach people how to improve a credit score. As you know it can make a huge difference when purchasing a home or getting any kind of loan for that matter!
Bill this has to be one of the most comprehensive articles I have seen about how to improve a credit score. You have done an outstanding job with this post. I am sure there are many people that could use this advice given how poorly the economy has remained over the last few years!
Hope you don’t mind answering a question. We had over an 800 credit score. I got hurt and went on disability. My wife also had to take an early retirement. We paid off all our bill except the house which we could not sell.
There was a big drop in the homes value. We put down $45,000 when we bought in 2005. Our balance on the mortgage was $145,000. Bank of America refused to help us and we could no longer afford to make payments. We were able to do a short sale but missed payments to BOA. The house sold for $89,000. The only bad thing on our credit was the short sale. Will we ever be able to buy again? Rent is twice what our mortgage payment was.
R Smelser – I am sorry to hear about your financial difficulties. After completing a short sale if you work on building your credit scores back up again you should be able to buy again in two to three years. Following the advice in the article will allow you to improve your credit score. Here is an article on improving your finances after a short sale.
Bill, how do you improve your credit score after a Ch 7 Bankruptcy discharge? Mine took place 2/2012. What can I do in the meantime to rebuild to become mortgage worthy again? I have three credit cards with zero balance (only $700 total limit combined!) they are secured credit cards. I believe I can’t qualify for 3 years (2015) Thanks Bill. Lynne
Hi Lynne – You will want to have a few different kinds of debt that you always pay on time. Building back your credit scores can be done by being consistent with your payments.
Yes, good article, very informative. I just want to add that I believe that if you’re going to improve your credit score drastically you need professional help. For me it was certainly worth it in the end. I went through Lexington Law and was very happy with my results.
I recently used myFico dot com to get my scores and reports, signed up for their quarterly reporting as well. After looking at my reports, I decided to try for a couple of new lines of credit now, so they would have time to age before I try for my mortgage in 18-24 months.
I was denied, and got my score from the creditor, it was almost 200 pts different than the one from myFICO. How is it possible to even know an accurate score? Seems like FICO is a scam to me…. if I can’t see the same score the lender sees, what’s the use? If all lenders don’t get the same score, how is that supposed to be fair to consumers?
As far as I am concerned, FICO needs to be standardized. Period.
Good info Bill. Two common mistakes i see people making when trying to improve or increase their credit score is they pay off their collections. The damage has already been done to their credit score, paying it off will improve their credit score. Even worse is when they go into a payment schedule on a debt that is in collections. The collection agency keeps reporting the collection as current and lowers their score even more!
Also, paying off an installment loan, even if it has been paid on time, rarely ever improves a credit score. Save your money and pay down the balances on a revolving line of credit like a credit card.