When Your Credit Score is “Close,” Work a Little Harder

Credit-worthy consumers are paying the price for the sub-prime market collapse, making it more important than ever to build and maintain high credit scores before purchasing a home.

According to FICO, the best rates and terms go to those consumers with all credit scores form the “Big 3” credit bureaus (Experian, Equifax, and TransUnion) at 760 or above. And close doesn’t count.

Even though a score of 756 puts you in a category where only 2% of consumers in your FICO® Score range ever reach 90 days past due, you need those extra 4 points in order to qualify for the best rates. Earning them can save you thousands of dollars per year, depending upon the size of your loan.

How can you inch those scores up a notch?

Your credit report itself will give you some clues. Look for the section that tells you why your scores are as they are. The solution may be as simple as using a dormant account, or transferring part of a credit card balance to a different account, to lower the “use to limit” ratio on one card. Of course, paying down balances is always helpful.

Why use a dormant account? Because your score is based on your bill-paying habits. If you use the account, you can’t demonstrate that you make payments on time.

35% of your score is based on payment history, and you can’t change history. If you have late payments or other negative information, you’ll have to wait for time to lessen the impact.

But another 30% is based on the amounts you owe relative to what you could owe. And this is one area where you can take control. Strangely enough, this is calculated on a per-account basis rather than overall.

Thus, you could have six cards with little to no balance, but if one card is at 80% of it’s limit, your score will be negatively affected. Unless you can pay it down, it’s wise to move that balance to another card or cards to get your usage under 30% on all accounts.

15% of your score is based on the length of your credit history. Obviously, you can’t alter that. But you should be careful not to close an unused account that you’ve had for several years. Instead, use it occasionally to keep it active.

10% is based on “new credit,” and that includes the number of hard inquiries on the file.

A hard inquiry is one made for the purpose of making a credit-granting decision. It counts against your score even if you did not open a new account or take a credit line increase as a result. Inquiries you make yourself are not considered.

This portion of the score is the reason why real estate agents and mortgage lenders advise their clients not to apply for new credit cards or to allow any retailer or service provider to check their credit in the months preceding a home purchase.

The final 10% looks at the kinds of credit you use. For the best scores, you should have a mixture of revolving and installment debt. But if you don’t have it already – now is not the time to go open a new account.

For consumers, the frustrating part of all this is that we don’t know the formula. We can’t say that one specific action will raise (or lower) our scores by 3 points or 5 points.

Why? Because the formula looks at the overall picture and weighs the various parts against each other. And because the gain or damage for one consumer will be different than for another consumer, depending upon their credit score at the time.

For instance, a consumer with a low credit score and a history of 30-day late payments will be slightly penalized for a new 30-day late – while a consumer with high scores and a clean payment history will be penalized severely.

If the proposed QRM (Qualified Residential Mortgage) rules under the Dodd-Frank Act go into effect, standards will be even tighter. So if you want to buy a home,  start now to work on raising those scores.


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Disclaimer: This information has been compiled and provided by CreditScoreQuick.com as an informational service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person's situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.