With mortgage rates at record lows and credit so tight, it is imperative to have high credit scores to assure the best possible terms for loans. Up until recently, having a 700 FICO score assured you of the lowest rates when borrowing. That paradigm has now changed. 740 is the new 700. The median credit score is 723. FICO scores range from 3o0 to 850. Fannie Mae and Freddie Mac now charge a “delivery fee” for loans with credit scores below 740 that translates to a higher rate or higher points for those borrowers depending on the loan-to-value ratio (LTV). Your rate will be better when you refinance with more equity in your home and if you are purchasing, your rate is better if the your down payment is bigger, especially if your FICO scores are 740 or higher. Conversely, your rate goes up if your scores are low and your LTV is high.

If you need to raise your scores, be patient because it takes time, effort and money! There is no quick fix. Let’s examine the anatomy of a credit score. There are five key criteria that goes into scoring borrowers.

1. 35% — punctuality of payment history (only includes payments later than 30 days past due) and derogatory credit such as bankruptcies, foreclosures, collection accounts and judgements 
2. 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
3. 15% — length of credit history
4. 10% — types of credit used such as installment, revolving and consumer financing 
5. 10% — recent inquiries for credit and/or amount of credit obtained recently

You are entitled to obtain a copy of your credit report every year. The only place to go is the website www.annualcreditreport.com. This website was set up by Trans Union, Equifax and Experian. The report is free. If you want to get your FICO score, there is a modest fee.  

Here are some tips to improve your scores. Make sure you pay your bills on time! I know it sounds simple, but a late payment on a credit card can decrease your credit score significantly. If your credit report has a late payment, time will heal the wound. Every month from the most recent late payment will continue to improve the score as long as there aren’t any subsequent late payments. If you feel that you have a legitimate dispute with a creditor, you can write a letter to the three credit bureaus to challenge the information. Yes, ALL THREE BUREAUS. A good resource for further information is the Federal Trade Commission. Click here to go to their website. It is full of useful information. 

You can also hire a credit repair company to outsource the task. An initial consultation usually runs about $250 and then expect a monthly fee of $75. It takes about six to twelve months, but your scores will improve by 50 to 100 points. You will recoup the fees through lower interest rates on your car loans, home loans and credit cards. Please make sure that you work with a reputable company. Feel free to contact me for a referral!

Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years once it is paid. If you are having trouble making ends meet, contact your creditors and set up payment plans. This won’t improve your score immediately, but if you can begin to manage your credit and pay on time, your score will eventually improve.

As for the amount of debt compared to the available limit, try your best to keep the balance below 50% of the limit.  Even if you pay down your balance, there may still be complications because banks have been lowering credit card limits lately because credit is so tight. If you pay off a balance, I recommend that you keep the acount open with a zero balance. If you keep switching to new credit cards, you may compromise your score because of the length of time that you have credit accounts. Of course, if you are new to credit, there is not much you can do about the length of time for credit. Time will take care of it. Don’t open a number of new credit cards that you don’t need, just to increase your available credit. This approach could backfire and actually lower score.

Home loans or credit cards are higher up the credit food chain than revolving debt from finance companies, furniture stores or consumer electronics stores. Beware of come ons like 90 days — same as cash! Too many consumer finance credit accounts will hurt your score.

Lastly, don’t apply for lots of credit accounts at the same time. Space out your credit requests over several months. There is a must readcalled Do You Make These 38 Mistakes with Your Credit? How increasing your credit scores will improve your lifestyle.

To see how much your scores will increase click here.

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