Give Your Credit Score a Not-So-Extreme Makeover

No matter what your numbers are, they can almost always be better. Improve your credit score with these quick financial fixes.

The goal of your mini-makeover is just to spend a month or so making sure that your personal stats paint as pretty a picture of your financial resources -- FICO scores, debt-to-income (DTI) ratios, reserves, and down payment money -- as they can, not to do a Dr. 90210-style surgical reconstruction of your entire financial life.

Make Sure Your Stats are Accurate

Credit reports are notorious for containing erroneous information, due to incorrect reporting by creditors or fraud. I once had a client come in who should have had good credit, based on her history of paying her bills. When we pulled her credit report, though, many delinquent credit accounts that she had never even heard of were listed in her name and under her social security number. Her investigation revealed that her own brother had been committing identity fraud against her for years! She never would have known if she hadn't pulled her own reports in the process of preparing to buy a home. By filing a police report and aggressively disputing the fraudulent entries with the creditors and the credit bureaus, she was able to dramatically improve her FICO score. The upshot? As soon as you get your credit reports from annualcreditreport.com, read them! Print them out or ask them to mail you a hard copy, and go through each report with a fine-toothed comb, marking it up when you see:

  • Late payments that weren't actually late;

  • Account balances listed that are higher than your actual balance;

  • Credit limits that are lower than they actually are;

  • Accounts that do not belong to you;

  • Accounts you thought were open that are listed as closed;

  • ANY other incorrect information.

Do the Quick Work

  • If you have any credit lines that are over the credit limit, pay them down below the limit -- immediately.

  • If you have a surplus of cash in the bank available for discretionary use (e.g., more than five percent of the purchase price of the homes you're looking at) or your credit limits are fairly low, consider paying as many bills as possible down to 30 percent or less of their limits. For example, if you have a credit card with a $600 limit, pay it down to $180 or less.

Here's how to do this: rank all of your credit accounts from lowest to highest limit. Start at the top and work your way down the list, multiplying each credit limit (not the balance) by .3 to figure out what 30 percent of each credit account's limit is. Then go back up top, and list the current balances all the way down the list. Go through the list one last time, subtracting the 30 percent amount from each balance, to see how much cash it would take to bring each balance down to the 30 percent target. If there are any accounts you can afford to pay down to 30 percent without depleting your reserves, do it today! Don't pay them all the way off -- the 30 percent target is what FICO looks for to show that (a) you are not financially dependent on your credit cards, but (b) you are responsible enough to use credit and pay your bills as agreed. And don't worry about the really big bills. If you owe $19,000 on a student loan with a $20,000 limit, it would take you $13,000 to pay that loan down to 30 percent of the credit limit. If you have that much cash, paying that loan down is probably not the best use of it when you're considering buying a home. Plus, in the time it takes to save up to pay a really big bill off, the home of your dreams might be a whole lot more expensive than if you had bought it before you paid the large debt off. Pay down the smaller ones and keep the rest in the bank for your down payment, closing costs, reserves, or your bill at Home Depot or Lowe's once you move in!

  • If you happen to be one of those uber-responsible folks who uses credit cards for everything, then pays them off every month -- STOP that practice until you are warmly ensconced in your new place. Credit scores are a snapshot -- the creditors only report your account balances once a month. If your account picture is reported on the day of the month you have huge balances, rather than the day when you've paid them off, your report will look like you are living on your credit cards! The 30 percent of credit limit benchmark is an ideal account balance to maintain for purposes of maximizing your FICO score -- not more and, surprisingly, not less. So, until you have actually secured your mortgage, stop running your cards up beyond that 30 percent, even if you plan to pay it off every month.

  • If you have cards that have been unused at all for awhile, or lots of cards with no balances, go use a few of them, but refrain from going over that 30 percent of credit limit target. You want to show that you have the financial ability and the ethics to responsibly use credit.
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