Credit Challenges

Credit Scoring

Dealing with Challenges

Typically, a person with a bad credit score is in this position because of employment complications, unplanned health complications or they lack structure in their life.

Let’s take a look at some examples that can help to quickly improve less-than-perfect credit scores for a potential homebuyer.

Spread Debt Among Several Credit Cards
Borrower 1 has a credit score of 664. They have a concentration of credit card debt on one card; let’s say $17,000 on a card with a $20,000 limit. At the same time, they have four or five additional credit cards, all with a zero balance. If the borrower distributes the debt over the cards that are available to work with it changes the ratio of debt to available credit. This can cause their credit score to pierce through that magical threshold on the credit score chart, and put them in the 680-699 category of having good credit.

The Influence of Each Credit Score Factor on Your Credit Score
Borrower 2 has a “credit high” (the maximum debt allowance on all cards, combined) of $20,000. They have one card that is used for business purposes that is pushing the limit. By getting two new cards, each with a $5,000 limit, and spreading the debt out over the cards they’ll create a 30% margin of available credit on all the cards. This will affect the factor of credit history, but this specific factor only affects the overall score by 15%. The big difference, once again, is the resulting impact on the credit balance factor, which has a 30% influence on the overall score and can cause the overall calculation to pierce through the next level on the credit score chart.

Keep Credit Cards Where You Have a Long Credit History
Do not close existing credit card accounts, even if they are at a zero balance. Some people think they are doing themselves a favor by having fewer cards, and they lose out on the credit history factor. Even if you do not have a good rate on an old credit card, you are rewarded for having the long-term credit history, and from time to time you should make a small purchase to keep the account in an active status.

What to Do Next
These are just a few examples of what you can do to improve your credit score when you consider buying a home. If you are disappointed by the fact that you cannot get the A-Paper loan up front, your mortgage lender can monitor rates and your specific loan scenario on an ongoing basis and advise you when you will have a chance to turn this situation around. The new mortgage debt will temporarily drop your score, but once the first payment registers as “paid,” your score will begin to go up again and eventually present the opportunity to refinance at a lower rate.