Improving credit score
 

I recently had an opportunity to sit down with my 21 yr old son and a mortgage broker I have used in the past. Ostensibly, we were there to apprise my son's ability to purchase a home and the discussion was mostly about credit scores.

The broker suggested that lowering all credit balances to at least 50% is key. He emphasized that the goal is to get it under that mark, not pay it off. Also, he said that instead of paying down to zero, that it is beneficial to maintain a small balance of around $100. He also stated that it is generally not a good idea to use finance companies such as GE Finance, Household Finance, etc, as opposed to Visa, MasterCard, AMEX.

I left the meeting intriqued by this information and am wondering if anyone else can add their own experience with improving credit scores.

Re: Improving credit score
 

Well, first off, it seems that my old thread has returned from oblivian, and many people had asked similar questions to this.

The thread is entitled "Ask the loan officer" and you will probably find more information in there than I am going to type now :p

The broker was correct in a couple of points, incorrect in others. I will go through them one by one.

1) Lowering credit card balances to 50%, not paying them off -False The credit reporting agencies keep track of the highest balance that you have ever had on your credit card, and although the current balance has more of an impact, the highest ever on that card will affect the credit score as well. Paying it off will be discussed in a lil' bit...

2)Also, he said that instead of paying down to zero, that it is beneficial to maintain a small balance of around $100 - False

The credit reporting agencies have no idea (usually) if you pay a credit card off each month or not. To understand this, you must first understand that the Credit Reporting Agencies take a "snapshot" of your current credit obligations. On the date that the credit card reports, the balance at that time will be reported. If you pay it off 1 day later, the credit reporting agency will be none-the wiser, and that way you can avoid paying interest. As most credit cards don't disclose specifically when they report, it is usually safe to just make your monthly payment (paying the card off) and charging something on it again within the next couple of days. As long as that card has a balance, even $1, it will count as a good mark (providing you are below 50% of the limit) on your credit. A paid off credit card also is good, but isn't nearly as helpful as a credit card with a small balance.

3)He also stated that it is generally not a good idea to use finance companies such as GE Finance, Household Finance, etc, as opposed to Visa, MasterCard, AMEX True

There are different types of credit, "bad" credit is generally credit that there are low underwriting guidelines on, which finance companies generally specialize in. In addition to the above listed companies, store cards (ie Best Buy, The Home Depot) also fall into this category. There is much more in depth info in the previously mentioned thread, although you might have to search a bit :D

Finally, some tips on how to quickly raise your credit score -

Pay off as much debt as you can, especially unsecured. Keep a very, very small balance on credit cards, but pay it off each month to avoid paying intererest.

Depending on how long he wants to wait till he buys the house, the longer the time frame with no inquiries on his bureau, the better the score.

Make payments on time, obviously :D

Close any finance company related cards

Make sure all (if any) collections, judgements, and tax liens are paid and shown as paid on the bureau.

Also - Purchase a credit bureau online. I know transunion has a type of bureau that you can purchase that includes information on exactly what is hurting your score, and how you can improve it. It will also give your son a chance to make sure that all the information listed is accurate.

If you have any more questions, feel free to post em or PM me :D

Thank you for reiterating. Credit scoring is a nebulous subject, is it not?

Indeed it is. The credit reporting agencies are very, very secretive as to the exact formula of the score to keep them from being able to be exploited. Most of the knowledge that we have gained has been from experience working with bureaus/scores. Once the cat is out of the bag concerning a certain parameter, the Credit Reporting agencies generally will have no issues with confirming it, but to do so, the criteria must be widely believed to be fact.

Hundreds of different behavioral patterns from your bureau are utilized to calculate your score, it is nearly impossible to eliminate what does and doesn't effect your score, as it is difficult to prove that other factors do not play a role in addition to a certain charactoristic.

One of the things I did to get a good credit rating was to make lots of purchases with my credit card instead of my debit card and when I got home I would log in to my bank account right away and transfer the balance over that I just spent.

This would show lots of transactions with lots of payments.

Your score may have increased, but - The credit reporting agencies only see that you made 1 monthly payment on time and your balance is low.

The same effect can be achieved by charging a pack of cigarettes to your credit card, waiting for the bill, then paying it in full... Simpler, but perhaps less fun way of doing it :D

So that means if I ran up a big balance on my card several years ago and everyother month had a low balance my credit rating gets shot?

No, only if you currently have a big balance or had one in the very recent past.

I nearly maxed out a card and then paid it off within 3 months. After doing that I'm pretty sure it boosted my score considerably, because I started getting completely bombarded with CC offers.

Shot down, yes, but it will have less and less of an impact as time goes on. If possible, increase your limit on the card, but make sure you don't go past the highest amount you have ever had.

Two years ago I applied for a mortgage to buy a house, my credit score was about 560. I had several collections and several late payments that were very recent. Since that time I have had zero negative credit issues.....on time payments and no collections...basically perfect credit activity. My credit score has only gone up 30 points in two years. Is that normal.

Credit cards= bad
Debit cards=good

Charge what you can afford and pay in full each time. ON TIME!

Re: Re: Improving credit score
 

This fascinates me, and I have heard it before, but I still don't understand how leaving a balance on a card is better than paying it off and having a zero balance. When I have applied for mortgages, or when I was out shopping for them, i would pay off major cards prior to meeting with the lender, and my credit scores seemed good. Could you explain?

Pay your bills on time

DON'T have way too many charge cards adn don't have your credit run unless it is necessary.

Re: Re: Re: Improving credit score
 

I believe it goes something like:
A card with 0% balance could be a card you haven't used for 7 years, and in fact has been cut up. You might not even be aware it is open.

A card with a 1% balance is a card you are using, and have the self control to not max out.

IANALO. ;-)

Re: Re: Re: Improving credit score
 

Sorry for the delay, I hadn't checked back in a couple of days...

Basically, credit history is exactly that - history of payments being made. If you pay your card off in full, you may not actually show a history of a payment that month. I'll explain - Generally, credit cards report to the credit reporting agencies one time per month, to give a "snapshot" of your current financial situation. They report your balance, payment, highest amount ever borrowed, credit limit, if you are delinquent, ect.

If, however, you happen to have charged up your card and paid the balance in full before it reports, it will actually show a zero balance, therefore leading others to think that it was not used. It is also important to avoid borrowing on the card until it is near maxed out, because they will keep track of the highest amount you have ever borrowed, which, in turn, will affect your score.

I hope this clears up any questions... if you have any more, feel free to post them on the "Ask the Loan Officer" thread, as I usually check that daily... or at least try to :D