ASK MICHELLE - DECEMBER 15, 2006

CREDIT TIPS THAT WILL SCORE LOWER INTEREST RATES

A good credit score translates into lower interest rates for home-shopping borrowers.  In a lender’s eyes, the higher your score is, the less risk you are, and the more likely it is you will pay off your debt.  For this reason,  borrower(s) with lower scores usually end up paying higher interest rates on their loans.

If this is you, don’t panic.  There are a number of things you can do to adjust your credit score to receive a favorable review from the underwriter.  Here are a few suggestions:

SHOULD I PAY OFF ALL MY PAST DUE BALANCES AND CHARGE-OFFS?

This is usually a good idea, but you only need to worry about the past due balances and charge-offs that have occurred in the last two (2) years.  Items more than two years old have little effect on your credit score.  In fact, if you pay off delinquent items over two years old, it can actually bring your credit score down - something you don’t want to do.  Working to increase your score means you’ll get a better interest rate on your loan.

SHOULD I CLOSE EXISTING CREDIT CARD ACCOUNTS THAT I DON’T USE?

No, if you have three to five total trade-lines or accounts.  Part of your credit score is based upon credit history.  If you have credit cards that you don’t use very often, you still have the benefit of the credit history they represent.  If you have an excessive number of open accounts you do not use, it would be a good idea to close some of them.

Rather than trying to pay off all your credit cards, you can move part of the debt from one card to another to even out the distribution of debt.  Try to keep balances as close to zero as possible and definitely below 50% of the available credit limit when trying to purchase a home.  Also, if your credit provider will increase your line of credit, the ratio of debt to available credit is automatically reduced.

When married couples have separate credit card accounts, the debt can be transferred from one spouse to   another to clear up credit issues for the other spouse.  The spouse with clean credit can be designated as the sole borrower on the loan, but ownership of the home can still be under both names.
 

WHAT ABOUT ERRORS ON MY CREDIT REPORT?

If you have items that are showing up on your credit report that you know you have already paid, request that these items be  removed by the credit bureau.  They are obligated to rectify this within 30 days.

If there are items on your credit report that are less than two years old, send in your payment if possible and mark the back of the check with the following notation:  “Accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit record.”  If necessary, the cancelled check will be proof that this should be promptly removed from your credit report if it interferes with the closing of your loan.

QUICK TIPS TO IMPROVE CREDIT:

• Check your credit at least once a year with all three bureaus due to the increase in identity theft. This can be done free of charge once a year from each bureau.  (Maryland residents only.)
  
  
• Make sure you close any account you don’t use or haven’t used!
  
  
• Make sure your credit card limit and balance aren’t the same - as that will decrease your credit score. Ideally, you would want to maintain a 50% ratio or less between the balance and limit.
  
  
• If you transfer balances, make sure you close the old account.
  
  
• Limit the amount of credit cards you have and/or charge.
  
  
• Pay your bills ON TIME!
  
  
• If there are open collections, charge offs, etc., call each of those creditors, as them to settle, make your   payment, and be sure to get documentation in writing that states it has been “Paid in Full” or “Satisfied.”  Make copies of this documentation, keep one for yourself, and then mail it to each of the credit bureaus.  *See attached Credit Bureau Contact Information
  
  
• Keep your credit usage to a minimum.  Typically, a mortgage; one or two vehicle loans; and one to three credit cards (where the balances are not maxed-out) is ideal.

Michelle A. Mathews
Senior Home Mortgage Consultant

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