Avoid these and boost your credit score
By Sandra Block
If you're planning to sell your house in this sluggish housing market, you need to make a good impression. Clean the windows. Wax the floors. Power-wash the cat.
If you're a homebuyer, you need to do some housekeeping, too. Unless your credit record is spotless, you probably won't qualify for the lowest mortgage rates.
When you apply for a mortgage, most lenders will review your FICO score, a widely used score developed by Fair Isaac. A few months ago, borrowers with a FICO score of 700 usually qualified for the lowest mortgage rates, said Mavel Vargas, manager of lending research for Informa Research Services. Now, though, most borrowers need a score of at least 720 to get the best rates, she said.
Most borrowers know that falling behind on debts will hurt credit scores. But other issues that could hurt your score may be less obvious, including:
As far as your credit record is concerned, Ulzheimer said, a "same as cash" offer is a loan. When you apply for the offer, the lender, usually a finance company, will pull your credit reports to check your creditworthiness. A credit inquiry can reduce your score.
Worse, the loan will hurt your "credit utilization ratio," which accounts for 30 percent of your credit score. This ratio refers to the amount of money you've borrowed as a percentage of your available credit. Your credit score will reflect your overall ratio, along with the ratio for each of your accounts.
Now, suppose you use a "same as cash" deal to defer paying $5,000 for a home theater system for 12 months. That $5,000 will appear on your credit report as a loan until you pay off the balance. And your credit record will show that you've used 100 percent of the credit available from the "same as cash" account. If you apply for a mortgage during that period, Ulzheimer said, "don't expect to get the best interest rate the mortgage lender has to offer."
Here's how: Say you have a $15,000 home-equity line of credit, and you've borrowed $3,000. If your lender freezes the line of credit, your credit report will reflect that you've borrowed the maximum amount available.
That won't necessarily hurt your score, said Craig Watts, spokesman for Fair Isaac. Fair Isaac's scoring model tries to distinguish home-equity lines from other types of revolving debt, such as credit card accounts, Watts said. That's important, because revolving debt is considered riskier than installment debt, such as a car loan or a mortgage.
But, Watts said, "it isn't always possible for Fair Isaac to distinguish a HELOC (home-equity credit line) from other types of (revolving) credit. It's one of those vagaries between lenders and credit bureaus that frustrates score developers."
His advice? If your home-equity line is frozen, pay it off before applying for a mortgage. "As far as your score goes," Watts said, "the best way to treat any account that's being reported as having a very high utilization rate is to pay down the account."
"Everybody thinks they have a 30-day grace period," Ulzheimer said. "If your bill is due on the 25th and your bank gets the payment on the 26th, they can report you as being late."
Unfortunately, if your credit report shows delinquent payments — and the information is accurate - there's no quick way to repair the damage to your score, Ulzheimer said. Late payments stay on your credit report for up to seven years. If, however, you regularly make on-time payments, you should see an improvement in your score after several months.
Lenders' standards "are getting higher and higher," Ulzheimer said. "Don't give them any reason to think you're more risky than you really are."
