February 06, 2009

Helpful tips to keep your credit near the top…

Tip #1 Keep your credit card balances less than 1/3 of the limit. So if the limit is $1500, don’t let your balance get above $500. If you have credit cards that are more than 1/3, either pay them down or get the limit increased—either will help your score (assuming that the inquiry won’t hurt you—see last weeks blog).

Tip #2 Have at least three active trade lines. This means that you have had activity on them within the past 6 months. Trade lines are things like a mortgage, a car loan, a credit card… So once a trade line ages so that there has been no activity in the last 6 months (like a paid off car loan), do something else to make sure that you always have at least three (but no more than 8-10).

Tip #3 Have between 2-5 major credit cards and use at least one. Major credit cards are Visa, Mastercard or Discover. This does not mean that you should carry a balance or even pay interest. When you use them, set the money aside because it is truly already spent. That way when the bill comes, you can pay it in full. Do not get more than 6 major credit cards. If you need additional credit, it’s better to have six or less and just get the limits increased. Also, keep these open. Most people want to close paid off cards, but having available, unused credit helps increase your score.

Side note on American Express—this one is tricky. Most American Express cards don’t have a limit, you just have to pay them off in full every month. On most credit bureaus AmEx reports the previous month’s balance as the limit which means that it’s easy to have this card show as having a balance above 1/3. And the closer you get to your limit, the more it hurts your score. It’s not uncommon to have an AmEx card show that your balance is at or above your limit. The compensating-factor to this is that if you have an AmEx card with perfect pay history, it is really good and can help your score…this is just a tricky one like I said before.

Tip #4 Do not keep any active store-specific cards. The mere presence of those cards can pull down your score. I’m talking about Target cards, Sam’s Club cards, Nordstrom’s cards… If you get one of these to get 10% off your purchase, just pay them off and close them.

Tip #5 If you are thinking of buying a home: Do not pay off collections that are more than two years old until the underwriter requires it. I know, this sounds backwards! The way that collections are reported doesn’t make sense. Most collections sit stagnant on a credit report until there is activity, such as a payment. That payment changes the “report date” from the initial collection date to the payment date. And an old collection with a balance hurts the score way less than a new collection with a $0 balance.

Paying off recent collections is good, but it’s better to sit on old ones until the underwriter requires it or after you have closed on your home. But just know that the underwriter will probably require the collections to be paid off.

Tip #6 For your buyer again: Do not get any new installment loans (car loans, signature loans, personal loans) within 6-12 months before buying a home. Installment loans hurt your credit if they are less than 6-12 months old (6 is the minimum age, 12 is better) and also if the current balance is close to the initial loan amount. If your borrower must get an installment loan, have them get it for more than they need and then immediately pay back the excess. This way the loan may be new, but at least the current balance is proportionately less than the initial loan amount for being a new loan.

Tip #7 NEVER pay debts late! This one seems so obvious, but it’s amazing how many people these days just don’t pay their debts on time.

Posted By: Brad Sears