Step 2: Repairing your credit

Last month I explained how step 1 in buying a home was getting prequalified. This includes getting your general credit worthiness  taken in the form of a credit score. This is one of the absolute factors required in prequalification because you must have a credit score determination prior to any vetting of information.

And as I stated last month, for an FHA loan, you’ll need a credit score of at least 580.  So, if you haven’t done so already, go ahead and check your credit score for FREE right here with one of these links: freecreditscore.com or freecreditreport.com

If your score shows up lower than a 580, no need to worry, but we’re going to need to raise it a bit. Here’s how:

1.Don’t have a credit card? GET ONE!!

Having and using a credit card are essential to building your score.  If you can’t qualify for a regular credit card, get yourself  a debit card where the bank gives you a credit line equal to the amount that you deposit into the account. Also, look for a cards that report to all three credit bureaus.

2. Now, purchase something and pay it right off.

When attempting to climb your way out of debt most financial advisors  will recommend that you pay off the credit card card with the highest rate first.  However,  the strategy I want you to employ here is paying down the cards that are closest to their limits. Lenders like to see a big gaps in the amount of credit that you’re using compared to the amount of credit that you actually have available to you. In other words, getting your balances below 30% of the credit limit on each card is GREAT!  Below 10%, even better.

3. Don’t go crazy, limit your purchases.

If you regularly use more than half your limit on a card, consider using other cards to ease the load. Also, try making a payment before the statement closing date to reduce the balance that’s reported to the bureaus. Just be sure to make a second payment between the closing date and the due date, so you don’t get reported as late.

4. Got an old card that you don’t use? Use it.

Much like step 1, the logic here being that the older your credit history, the better. But if you stop using your oldest cards, the credit card company may decide to close the accounts or stop updating them to the credit bureaus. The accounts may still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts.

So you might want to charge a recurring bill to one of those little-used accounts, or treat yourself (or a friend hint, hint) to dinner and a movie.  But remember, be sure to pay off the balance in full.

5. Dispute negatives marks, and use a sob story

If you’ve been a good customer, a lender might agree to simply erase a late payment from your credit history. More than often you’ll have to make the request in writing, but it can’t hurt to ask, and speaking with someone over the phone puts a real human, with real struggles, in front of the lender (or at least in front of an employee) on the other end of the line.  It’s been a rough few years for EVERYONE, and it’s not easy to make someone’s life harder, especially when they are sincerely asking you for help.

Here’s the stuff that’s usually worth the effort of correcting with the bureaus:

  • Late payments, collections or other negative items that aren’t yours.
  • Credit limits reported as lower than they actually are.
  • Accounts listed as “settled,” “paid charge-off,” or anything other than “current” or “paid as agreed.”
  • Accounts that are still listed as unpaid that were included in a bankruptcy.
  • Negative items older than seven years (10 in the case of bankruptcy) that should have automatically fallen off your reports.

Other actions to beware when you’re trying to improve your scores:

  • Asking a creditor to lower your credit limits. This will reduce that all-important gap between your balances and your available credit, which could hurt your scores. If a lender asks you to close an account or get a limit lowered as a condition for getting a loan, you might have to do it — but don’t do so without being asked.
  • Making a late payment. The irony here is that a late or missed payment will hurt good scores more than bad ones, dropping 700-plus scores by 100 points or more. If you’ve already got a string of negative items on your credit reports, one more won’t have a big impact, but it’s still something you want to avoid if you’re trying to improve your scores.
  • Consolidating your accounts. Applying for a new account can ding your scores. So, too, can transferring balances from a high-limit card to a lower-limit one or concentrating all or most of your credit-card balances onto a single card. In general, it’s better to have smaller balances on a few cards than a big balance on one.

By the way, all these suggestions work best if you have poor or mediocre scores to begin with. Once you’ve hit the 700 mark, any tweaking that you do will tend to have less of a positive impact. And if your scores are in the “excellent” category, 760 or above, pat yourself on the back. You’re done. It’s not gonna get any better than that.

Next month we’ll turn your prequalification into an actual pre-approval letter. That way, all you’ll need is your checkbook and  a knowledgeable realtor, like me, to get you into the right house.

Sincerely,

Lawrence Chaves

DRE# 01893036

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About Lawrence Chaves

Lawrence Chaves Keller Williams Beach Cities BRE# 01893036 Member of the South Bay Association of Realtors, California Association of Realtors, and National Association of Realtors. Specializing in residential and income properties in the South Bay and Beach Cities of Los Angeles County. 1st time buyers & new to the South Bay are welcome. Taking appointments now. 1601 Pacific Coast Hwy Ste. 265 Hermosa Beach CA 90254 Phone: 310.722.5959 Email: LJChaves@gmail.com Website: http://lawrencechaves.kwrealty.com/
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