If you follow the basics of a good credit behavior and do not miss your payments, your credit score should be good enough to get any loan you want. Right? Unfortunately, not always. I learnt it the hard way in the process of applying for a mortgage. Just a couple of weeks before the closing, the lender notified me of my score dropping below the bank’s lending requirements.
Within a few years you can do wonders with your credit score – increase the credit age, demonstrate that you use your credit responsibly by having several accounts of different types (credit cards, personal loans), etc.
Not everybody has a luxury of waiting for a few years. Here are a few things you can do in a matter of several months to a year if you need your credit score to be in the best shape possible:
Tip 1: Do not take new credit. In the short run, it harms the credit score in 2 ways: creates hard inquiries on your credit report and dilutes the credit age.
Hard inquiries. A single hard inquiry typically does not significantly reduce the credit score (and the impact fades away after a year; after 2 years an inquiry completely drops from the report). However, numerous inquiries within a short period of time can be rather harmful. I personally fell in two traps with them.
First – when applied for a car loan at the auto salon which in turn contacted several banks that all pulled my credit score. In ideal world, the algorithms should have recognized it as one event, yet in my case they did not, leaving me with 4 hard inquiries. You can dispute these inquiries later on, yet it takes time and effort.
Second – I just changed jobs and the company opened a corporate credit card for me, leaving me with one more hard inquiry shortly after the previous 4. Depending on how the corporate credit card program is structured, some companies do hard inquiries and others do not. If your mortgage application is several months away and your credit score is not stellar, you might wait to open a corporate credit card.
Credit age. Credit age is calculated as the average age among all your loans. Let’s take a simple example: if you have a credit card for 10 years and have just opened a new one within a month, your credit age would be 5 years. (Credit age is also the reason why you should not close your old(est) credit card. Instead, you should make a payment with it occasionally, so that it does not drop from your credit report).
Tip 2: Increase credit limit with your credit card lenders to minimize credit utilization (“stellar” utilization is below 10%). If you have a good history, it will take 3 minutes on your end to make a call or fill in an online form.
Tip 3: Check your credit report to see whether there are any activities that you do not recognize or that look wrong (like missed payment or derogatory marks). You can dispute these items with the credit bureaus.
Now, let’s see what you can do if you do not have a few months to work on your score. If you find yourself in a situation that your mortgage is getting to a closure and suddenly your credit score drops, do not panic. You might be able to boost it in a matter of a few weeks or even days (I did boost mine by 53 points in 8 days).
Tip 4. You can do several steps yourself:
- Pay down your credit card balances (this will decrease credit utilization). It is important that you do not pay off your cards entirely. Leave ~$10 dollars on each of the cards that you use.
- Try not to use your credit cards for the period the score is getting recalculated to not muddy the waters.
These steps will still take some time to flow through the system. If you are pressed on time and a score is a deal breaker, it might be beneficial to involve professionals.
Tip 5. Your mortgage salesperson might work with a professional agency (and could be motivated enough to help without any costs to you). These agencies will run scenarios on the steps to take in your situation and will work with the bureaus on rapid re-scoring.