Most people do not think about credit until they are thinking about or in the process of purchasing a home. The reality is, by going through some simple steps throughout the year, everyone can keep their credit in good shape and be in "loan condition" at all times. Here is a scenario with some results that may be surprising:
Take an average couple that buys a home with a $150,000 mortgage on a 30 year fixed, and buys a $20,000 car every 5 years for the next 30 years. This couple would cost themselves over $125,000 by having a 620 credit score, compared to a 720 credit score over that same 30 year period.
With the recent credit crunch and lenders becoming more and more strict with their lending guidelines, here are some tips to make sure your credit stays loan ready at all times:
1.) Collections - Often times I will pull a client's credit and they have no idea about a small collection just hanging around and killing their credit. In this situation, it is best to contact the company that issued the collection right away. These companies are very tough, they deal with people everyday who are rude to them and intentionally deceive them to get out of paying. The best way to handle this is be nice and be prepared to pay the item when you call for the first time. These companies keep very detailed records of every phone conversation you have with them. Tell the agency you just had a credit report pulled and found out there was something on your credit. Ask them if they can help you find out where it came from. If this sounds remotely accurate, it probably is. Explain to them that your credit is very important and this is the first time you are hearing of the collection. At that point, ask them about the possibility of obtaining a "deletion letter" if you pay the collection right then over the phone. A deletion letter is like the holy grail of credit repair. With a deletion letter in hand, it is as if the collection account never happened. Use your payment as leverage to obtain this letter. If the first person does not give it to you, kindly ask to speak with a manager. This will almost always be required to obtain a letter. Unfortunately this will not always work, which will require you to look at your specific scenario before paying the collection. Always remember to be nice!
If you are within 60 days of making a major purchase, paying a collection can actually hurt your credit score. Yes, you read that correctly as ridiculous as it sounds. The problem is many collections are old and eventually do not report as active accounts. Well, as soon as you make a payment, this account becomes an active collection and can hurt your score significantly.
Again, your best bet when faced with the collection is to seek the deletion letter, and if that does not work, consult with your mortgage consultant as to the best way to handle it.
2.) Avoid late payments -
Late payments can ruin a credit report like a fart in church. Occasionally it will sneak up on you, and once you realize it, it is too late. The only thing you can do is wait it out and hope no one else notices. These (late payments, not farts) are always well documented by your creditor, and nearly impossible to disprove unless you have enough supporting documentation to make an IRS auditor's head spin. Your only hope if a late payment proves to be correct is call and ask for a one-time "good faith adjustment" to your account. Yelling and screaming is not usually the preferred route to getting this done. Remember, any time you are nice to these people, you are in the minority of people that call, which might just work. You have a better chance of getting struck by lighting than this actually happening, but who knows...it is worth a shot!
If you have made it this far into this post, please award yourself by grabbing some sort of caffeine laced drink, so you can fight through to the end because this next section is very important.
3.) Credit cards -
While not everyone has collections or the occasional late payments, almost everyone out there carries credit cards. Some of you use them and pay them off immediately, others might use them for big purchases or take advantage of a 0% interest offer from time-to-time. No matter what your level of credit card usage, here are some tips to help:
a. Make sure that your "high limit" is reporting and reporting correctly on your report. By not having a high limit report, your credit report will score the credit card as if it is maxed-out.
b. Keep your balances under 50% of the limit at all times, and if possible under 30%. Having credit card balances over 70% of limit can cause serious problems to your credit score. Ex:
American Express with a $10,000 limit. Ideally you want to keep your balance monthly under $3,000 or at a minimum $5,000.
c. Keep credit cards open and active as long as possible. 15% of your score is based on the length of time you have had an account open. Even if you don't want to use a credit card, charge something small every few months and pay it off immediately. This will help your score significantly.
d. Parents, how can you help your college age kids get a head start on their credit? Add them to your accounts. I'm not saying you have to tell your children or give them access to the funds. But once you add them to your account, they pick up all your years of hard-earned credit history.
Again, maintaining your credit will give you the peace of mind to know that you will always be spending as little money on financing as possible!!!
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