Improve your credit score for a mortgage

Better Credit Means Better Mortgage Options

Generally speaking, the higher one’s credit score the better their choices when it comes to their Arizona mortgage options. In addition, mortgage interest rates are impacted by a borrower’s credit score.  Higher credit scores are usually rewarded with lower Arizona mortgage rates and those with lower credit scores are typically forced into mortgages with higher interest rates (the relationship between credit score and interest rate depends upon mortgage type and overall scenario).

It goes without saying that having a higher credit score can only help.  In many cases, it can save an Arizona homeowner thousands of dollars over the life of their loan.   Below are some suggestions and strategies that may help a borrower or potential homeowner improve their credit score.

Keep Credit Card Balances Low

Credit scores are impacted in part by how high the balance(s) are on a borrower’s credit card(s) or as the mortgage industry calls them – “revolving accounts.”  The general rule is the lower the balance on an active credit card the better.   More specifically, the opens in a new window3 major credit bureaus look for low “proportionate balances” which means the lower the outstanding balance compared to that specific credit card’s allowable high credit limit the better.    If a borrower keeps their balances low their credit scores will likely improve.  if one maxes their credit cards out, their credit scores will likely suffer.

Keep Credit Card Balances Low & Keep Them Open

Let’s take the first strategy one step further.  In the credit score game, it is beneficial to pay down a credit card balance however, typically it will hurt a borrower’s credit score if they close a revolving or credit card account.  Why?  One reason is that the credit bureaus see an open low balance credit card as a good thing based on the fact that it can serve as a source of emergency funds if the borrower runs into a financial rough patch.   If a borrower closes it, they no longer have a back-up source of funds.  Now, if a borrower has excessive revolving accounts it may be helpful to close some of them to show the bureaus that this borrower is not over extended.

Pay Your Bills On Time

Any credit gumshoe should have this at the top of their list however it is worth repeating.  Making a late payment on an account that reports to the credit bureaus is one of the fastest ways to send a credit score into a nose dive.   There is also a theory that “slow pays” (while not visible on the credit report) factor into a borrower’s credit score.  A “slow pay” is a late payment that is not 30 days late.

Adopt Credit

One tactic that may help your score is to become an authorized user on someone else’s credit card.  This may allow you in inherit the credit history associated with that account relative to your score.  NOTE: an authorized user account will not be considered toward the minimum number of trade lines needed per mortgage guidelines.

Strike a Balance

One aspect the credit bureaus evaluate is a borrower’s overall credit profile and it’s “balance”.  They look to see  how many of each of the different types of credit accounts available (installment, revolving etc…) someone has and if they have too many or too few of each.

Open New Trade-lines

If you are suffering from a lack of credit applying for and opening new credit/trade lines can help.  Beware, applying for multiple new credit cards can hurt due to the fact that this would result in numerous new “hard” credit inquiries AND a disproportionately low number of new open accounts.  The credit bureaus recognize when a borrower has several new inquiries and no or a low amount of new trade lines.  This is considered a negative because the bureaus feel that creditors are pulling your credit and then not deciding to grant you a new loan, credit card etc… because you may not be creditworthy.

Move Revolving Balances Around

If a borrower has lopsided revolving balances and has multiple credit cards, it may be a good idea to transfer balances around so that the overall proportionate balances are as low as possible.  One maxed out credit card can really hurt someones score (see our opens in a new windowHOW CREDIT SCORES ARE DETERMINED page for more).

Keep Up on Your Student Loan Deferment Dates

One of the most common and costly credit mistakes is forgetting when a first student loan is due.  Since most student loan servicers only report once every 90 days, by the time someone realizes they missed a student loan payment they have a 90 day late payment on their credit report.  A 90 day late on a student loan will cause a credit score to drop dramaticaally.

Collections: Don’t Pay Get a “Letter of Deletion”

Collection accounts are scored in a very unique way.   Once a collection account pops up, it will typically stay on a credit report for 10 years even if/when it is paid.  To make matters more interesting, the 10 year clock sometimes starts all over the day that a borrower pays the collection.  In the end, a paid collection is not necessarily better than an unpaid collection when it comes to one’s credit score.   In fact, paying a collection can actually cause damage to someone’s credit profile.  Before paying a collection, try contacting the collection company that holds the debt and asking them for a letter stating that they will delete the account from your credit profile (credit report) once a satisfactory payment is made.  GET THIS IN WRITING BEFORE PAYING.  This does not always work however it is worth the effort in order to try to improve your credit score.

Credit scoring is a complex system.  There is not a “one size fits all” approach to managing your credit.  While we are NOT a credit repair agency we can help you analyze your current credit profile and offer strategic suggestions aimed at helping you improve your credit score. opens in a new window  The HOUSE Team has experience helping clients who have less than perfect credit and we are here to help you!  Please call or email us today:  Team Number: 602.435.2149   Team Email: Team@JeremyHouse.comcreate new email.

*Each borrower’s situation is different.  Not all or any of the strategies listed above will work for everyone.  These strategies are suggestions and a more in-depth analysis of your specific credit report/profile would be needed to give more specific advice.

By Jeremy House
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