Enhancing Your Credit Score BEFORE Purchasing a Home
Below is an email I received from a lady wanting advice about enhancing her credit.
“My mom mentioned she’s heard how you help people quickly enhance their credit on your radio show. I had an instance where my monthly mortgage payment changed and because I was doing auto pay through the bank vs through the lender, I missed the update and therefore looked like I had missed a mortgage payment in January. What’s the best way to address this? Should we hire a lawyer? Do you have a recommendation? As we look to potentially buy a home in the spring market, anything we can do to raise my credit score will only help us get a better rate. Thanks David.
First off auto pay is an outstanding tool to help you pay your bills on time, but you have to make sure to adjust your mortgage auto pay if the mortgage payment increases because the rate on your adjustable rate mortgage, your taxes or insurance increased. I was lucky, my auto pay increased automatically when my adjustable rate mortgage increased, and my payment increased by $150/month. Elizabeth was not so lucky, and she has a late mortgage payment on her credit report which can cause major damage to her credit profile and credit scores.
I recommended she contact the lender to see if they will remove the late payment from her credit report, which she had already attempted and was rejected by her bank. She could hire an attorney but that would cost thousands of dollars and there is no assurance this investment in both money and time will get the bank to remove the late payment. Since we had six months to enhance her credit before she purchased a new home I put a plan together, which will help her, and her husband strengthen their credit profile and enhance their credit score.
- Step #1: I asked Elizabeth to contact all the credit cards her and her husband had and request they double their credit limits, in order to increase their credit availability. Cost to Elizabeth and her husband – the time it took them to call their credit card companies. The benefit of increasing their credit availability will help Elizabeth and her husband quickly increase their credit profile and score. Credit Utilization is the balance a consumer has on their credit card vs. the amount of credit they can borrow. The easiest way I can explain this is if Elizabeth had a credit card with a $1,000 limit and had a $500 balance she’d be at 50% credit utilization, which is not great. On the other hand, when the credit limit is increased to $2,000 the credit utilization would decrease to 25%, which is a lot better for Elizabeth’s credit profile and score.
- Step #2: I recommended Elizabeth and her husband pay their credit card off every Friday instead of waiting until the end of the month when they get their credit card bill. This will ensure there will only be one week worth of charges on their credit cards which will improve their credit utilization as explained in Step #1.
I also recommended they USE, that’s right USE, their credit cards for what I call the four T’s; toothpaste, toilet paper, tampons and transportation.
Using credit cards for daily necessities and paying them off every Friday will help a consumers credit profile and score. Shutting credit cards down after paying them off and not using them will ACTUALLY negatively impact a consumer’s credit score. The easiest way I can explain this is if Elizabeth had $10,000 worth of credit availability and was carrying $9,000 on her credit card, she’d be 90% capacity, which is bad for her credit profile and credit score. If Elizabeth paid down her credit cards to $900 and kept the available limit at $10,000, her credit utilization would be at 9% which would be outstanding for her credit profile and score. If after paying down her credit cards to $900 Elizabeth closed down her credit cards and reduced her credit utilization to $1,000 she would be back at 90% credit utilization, which again would be bad for both her credit profile and scores.
- Step #3: I recommended Elizabeth and her husband open a $1,000 personal loan at a local bank which reports the loan to the three major credit agencies. They will pay off the loan within three months, which will help enhance their credit scores. Upon paying off the loan the $1,000 is refunded at which time they will apply for the same loan and do another round. Taking out and paying off these types of loans will greatly enhance their credit profile and substantially increase their scores.
If you are purchasing a home, like Elizabeth and her husband, and would like assistance on enhancing your credit profile and score before applying for a loan please call Team Hochberg at 855-563-2843 or visit our website at www.perldavid.com.