Numbers don’t lie. Just ask the bathroom scale or the checking account balance. What you see is what you get (or have).
The same is true for your clients’ credit scores. The numbers matter. They especially carry weight when it’s time to apply for mortgage loans. The credit score can make or break applicants’ chances of being approved for a mortgage loan.
And when your client finds a house they want, they need to be able to move fast to secure it. Here are eight ways your client can improve their credit score to have a better chance at getting approved quickly.
Pay Bills on Time
Sometimes things just happen that prevent bills from being paid on time. Maybe it just kept slipping your client’s mind, or they forgot to drop the check in the mailbox. But here’s the thing — lenders don’t care. Not paying your bills on time or not paying them in full shows a lack of financial discipline that’s a big red flag to lenders.
And by the way, on-time payments can account for nearly 40 percent of their FICO score. So, tell your clients to pay bills on time and in full.
If You Can’t Pay, Negotiate
If your client can’t pay bills on time, odds are they know well enough ahead of time. They don’t want to let them go delinquent, but sometimes they can negotiate with the bank or creditor to extend the loan period and reduce the Equated Monthly Installment (EMI).
It won’t come without a few scars and bruises (metaphorically speaking, of course), but it will make a good impression on the bank, and it may save your client from incurring additional penalties.
Keep Your Credit Debt Manageable
Your client’s debt-to-credit ratio, or credit utilization ratio, plays a significant role in their credit score. The debt-to-credit ratio and how much debt they carry together account for 30 percent of their FICO score. A good rule of thumb is to keep their outstanding, unsecured credit below 50 percent of their annual salary. Also, keep credit card balances within half of the allowed limit. Using revolving credit at greater than 30 percent of the limit starts to negatively impact your client’s credit profile.
Use More Than One Credit Card
Tread lightly here, folks. The only thing worse than having one maxed-out credit card is having two. But there are some benefits to spending with two credit cards. Specifically, it can help keep the usage percentage under control.
Let’s say your client has a credit card with a $20,000 limit. They make several purchases to the tune of $15,000. That’s 75 percent of their credit limit, which is higher than they want (see tip #2 above). However, if they have two credit cards, each with a $20,000 limit, and they make those same purchases, but put $7,5000 on each card, now each card has about 37 percent of the limit.
Diversify Your Credit
There is good debt and bad debt. While all debt can keep people up at night, there is a distinct difference. Essentially, if debt increases net worth or has future value, then it’s good debt.
If debt doesn’t do that, and your client doesn’t have the cash to pay for it, then it’s bad.
Home loans, business loans, and even student loans are considered good debt. Personal loans and credit cards are the bad stuff. Having a good blend means that your client will be building an asset when it’s time to invest in a home loan.
Develop a Debt Payoff Strategy
If we could all wave a magic wand (or a winning Powerball ticket) and wipe out all our debt, we would without question. A more realistic solution is to pay off debts the old-fashioned way. A good strategy is to start with high-interest loans and small debts.
Bad debt, like credit cards, usually have high-interest rates and aren’t creating assets. They’re just draining the bank account, so get rid of them. Your client should accept that they’ll be paying on their student loans for years and focus on the toxic debt first.
Last, understanding the hierarchy in debt management promotes fiscal responsibility. Consider the following:
- Pay off the smallest balances first (get rid of payments)
- If balances are similar, then pay off the account with the highest payment threshold (doing so creates more monthly cash flow)
- If both balances and payments are similar, then pay off bills with the highest interest rate
Regularly Track Credit Reports
Credit reports used to cost money, albeit a small sum. Now, everyone is entitled to a free credit report once every 12 months. If your client hasn’t run a credit report in a while, they should go to annualcreditreport.com and get one going. All they’ll need is their name, address, social security number, and date of birth.
Once they have the report, they should scan it for any mistakes. It’s not common, but there have been instances where creditors report inaccurate information to the credit bureaus. It’s worth a look.
Monitor Joint Accounts or Co-Signed Loans
Be cautious when co-signing a loan or opening a joint credit account with anyone, especially someone outside of your close family. Closely monitor the statements regularly for any issues, and have them sorted out immediately. Your client won’t want to be held accountable for someone else’s bad financial decisions.
To learn more about getting credit mortgage-ready, have your client contact us here.
*Not intended as credit counseling, accounting, or investment advice. Contact your financial representative for more information.