Credit Score Tricks
Bad credit happens. The question is: How do we fix it?
You'll see all kinds of options if you Google “Credit Repair,” all offering a quick fix to your credit issues if you pay them a monthly fee. However, there are no quick fixes, and there are no shortcuts. If there were, these places would charge you a one time refundable fee, not a monthly fee they try to strech out for as long as you'll let them.
There is, however, a simple and straight-forward approach you can take to put yourself in a better position, raise your credit score, and be able to purchase a home, within a reasonable amount of time, usually 6 months.
The first place you want to start is getting a copy of your credit report and credit score. CreditKarma.com offers this for free. If your score is at a 580 or above, you can get approved for a mortgage in certain circumstances, through certain lenders.
If your score falls short of that, it is time to get to work. This means paying off collections, and starting to build positive credit history, which can be done simultaneously.
Your credit report will list all accounts that impact your credit. A lot of people have collections, especially medical collections on their credit. My lender can overlook up to $5,000 of medical collections for FHA financing. If you have more than that, or have non-medical collections, here are a couple things you can do:
Dispute collection accounts: Many companies will charge $100/month to do this, when you can easily do if for free. Basically, you go to each of the credit bureau websites, and say the account is not yours/that you have no knowledge of the account. The collection company then has 30 days to send proof the the credit bureau that it is indeed your account. If they do not, then it comes off your credit forever! Here are the links to the dispute pages on each credit bureau: Experian (http://www.experian.com/disputes/main.html) Transunion(https://dispute.transunion.com/dp/dispute/landingPage.jsp) Equifax(https://www.ai.equifax.com/CreditInvestigation/home.action)
Settle Collections: If you are not able to get them removed by disputing the accounts, you will need to start paying these off. The key here is to pay off the most recent accounts first.The credit bureaus can only report collection accounts for 7 years, after that they fall off. However, if you make a payment on an old account, they can report it for an additional 7 years from that date. So, concentrate on the newer bills, and let the older ones fall off with time.
You can usually settle collections for significantly less than what you actually owe. The key here is to NOT tell them that you are trying to clean up your credit to buy a home. If you tell them that, they know they have you on the hook, and will not settle for less than the full amount. Tell them you are considering filing for bankruptcy. If you file for bankruptcy they get nothing. You’ll have to sell it to them, but done right, they will settle for significantly lower than your actual balance.
Building positive credit is also important. Most lenders will want to see 3-4 active credit accounts in good standing, for about 6 months. The simplest way to do this is by:
- Get a secured credit card from your bank or credit union. Basically, you will deposit a certain amount with the bank, and they will give you a credit card with a credit limit of the amount that you deposited. The more you are able to put down on the card, the better, as higher credit limits are looked more favorably upon. Whatever your credit limit is, do not let your balance on that card exceed 20% of the credit limit. Also, be sure to make payments on time every month.
- Become an authorized user on a family member’s credit card. Another trick you can use, is to have your name added as an authorized user of someone else’s credit card, and reap the benefits of their credit. Just be sure they have a low balance to their credit limit. If they are maxed out, this will hurt your credit more than it will help.
- Get a Credit Builder CD. This is a fantastic product that a lot of banks offer. Basically, you are purchasing a Certificate of Deposit (similar to a savings account) on credit. You pay them something like $45/month for 2 years, and at the end you have a $1000 CD that you can cash, or use as an asset. BMO Harris, Regions, 5/3, and Chase all offers these. Some local credit unions do as well. You'll typically have to go in to the bank and ask a manager for this info, as they typically don't advertise these programs.
All these are good tips, and can get you on the right track to better credit and eventually getting approved for mortgage financing to purhcase a home.
If you would like specific advice based on your unique credit profile, our mortgage brokers are happy to help, with the only cost being the cost to pull your credit report, which is $20/person, or $30/married couple. Fill in the following contact form, and we will have them reach out to you.