Credit Scores - How to Improve Your Credit Score

"Improve your credit score and get the lowest mortgage loan rates."

Credit Scores - Some Myths and Factors That Affect Your Rating.

One myth being spread about credit scores is the notion that paying off old collection and charge-off accounts will improve the borrower's chances of being approved for their home loan application.

For the most part, derogatory credit remains in a consumer's credit file for seven years -- Chapter 7 bankruptcies last 10 years -- that's seven years from the date last active. By paying off these old accounts, the date last active changes from say, six years ago, to the current month, and the seven-year clock starts all over again affecting credit scores longer term.

To make matters even worse, the credit scores are weighted by how recent the derogatory accounts are. A one-month-old "Paid Collection" account does far more damage to a FICO score than a six-year-old "Charge Off." While it may seem ironic that making good on one's obligations can hurt a consumer's credit scores, it does.

Click here to get your own free credit report w/free credit score.

A client in this situation may have a couple of effective methods at their disposal. If the client has the cash to pay off the old accounts, they should call the creditor reporting the collection account. It is important that they insist on speaking with a credit manager that has authority to negotiate settlements.

Once this individual is found, you should offer a settlement of 70% or so (be flexible) of the outstanding balance. This offer must be on the condition that the status of the account be reported as simply "Paid", not "Paid Collection" or "Paid was 60", etc., and the date last active remain unchanged. Make sure the client receives this agreement in writing prior to making any payment.

It is important to note that the older the account is, the easier it is to negotiate such a settlement. The client should simply let the old accounts fade off the credit report with time.


A common myth is the impact of inquiries on credit scores.

Inquiries fall under the general category "Pursuit of New Credit." Also in this category is "Length of Time Since Most Recent Account Established." I can assure you that two new credit-card accounts opened last month will do far more damage to a FICO score and credit scores than a few inquiries.

Additionally, the entire category "Pursuit of New Credit" is fourth on a list of five categories that affect credit scores (which I outline below), and is estimated to carry a weight of 20%-30% in determining a score. Simply, inquiries, unless excessive and recent, have very little impact on credit scores.

Even more important is the way mortgage inquiries are now handled. First, they have no impact on credit scores for thirty days (the same applies to auto loans). Additionally, all mortgage inquiries within a 14-day period count only as one single inquiry.

Because the score is a composite of all the applicant's credit information, no single factor like a late payment or a bankruptcy will be the sole cause of an unacceptable score. Scoring can be difficult to understand and explain to consumers.

This article is taken in part from a FICO newsletter by:

Mr. B. Thomas
The FICO Doctor

Related Pages

Credit History and Mortgage Approval - Your credit history affects your mortgage approval chances - Get a free credit report with credit score and qualify for a lower mortgage loan rate.

Credit Report Guide - Information and advice - Credit Report Guide - Resource links and tips about examining your credit report for errors and omissions.

Applying For A Mortgage - Tips on how to apply for a mortgage - What to look out for when applying for your next home mortgage loan.
 

Home Loans In The News

	Web Home-Loans-Help.com