The Mortgage Man

Get more out of your mortgage experience!

5 Ways To Improve Your Credit Score – Lesson 1

In today’s lending environment, only the best credit risk borrowers will get a loan.  Are you one of them?

Credit scoring has been used by banks and lending institutions for years.  And for much of the last 10 years there were opportunities for any type of credit borrower…you just have worse terms for bad credit.  It is really a simple concept – someone who has had credit issues or has not managed their finances well do not get the same deal that others get who have sacrificed to keep their credit in tact.

Whether you agree with this phylosophy or not, lenders do, and they call the shots if you want to borrow money.  In this series I am going to address the most serious issues and how you can recognize and fix them to improve your credit rating, and ultimately save you money on interest and financing fees.

1) Debt Consolidation

Debt consolidation sounds like a good idea right?  You take several debts that you have (assuming they have high rates) you find a new account that will allow you to roll all of them into one payment, usually at a lower rate or better terms, then you cancel the old cards and go about your happy financially responsible way.  This would be a good idea if it ever worked that way….but it doesn’t.

What happens instead, to an overwhelming number of you, is that after “paying off” these other debts into a new consolidation loan, you now see a whole new realm of possibility at the mall or at the local car dealership.  Seeing these credit cards that were maxed out for so long that you stopped carrying them suddenly becomes too tempting to pass up, and you are off to support more bad habits that got you into the previous mess to begin with.

I am about to tell you something that you will probably never hear from another mortgage banker, or anyone who makes a living from lending money.  Are you ready?  Wait for it………YOU CAN’T BORROW YOUR WAY OUT OF DEBT!  I don’t know if I can be more clear than that.

When you consolidate debt, you are not paying it off, you are simply moving it from one account to another.  i know that the term “eliminate debt” is thrown around in debt consolidation circles, but the only way to eliminate debt is to actually pay it off.

Now that I have beaten you up about it, let me tell you how to consolidate debt and make it work to your advantage.

Part of your credit score is based on your ratio of debt to available credit.  It is considered to be a negative factor if you owe $5000 on an account that has a credit limit of $5000 for obvious reasons.  If you are maxed out, you are seen as a risk that you can not manage debt well, and your score will be affected accordingly.  Equally, it is considered to be a negative if you have $5000 available, and you always carry a $0 balance.  Because a credit score is essentially a debt score, you are not seen favorably if you never carry debt.  The idea behind this is that if you do go out and buy a big ticket item, you may have trouble adjusting to the new payment.  (I don’t make the rules, I just report them).

It sounds like a losing proposition no matter what you do right?  Wrong.  The way around this is to not close the old accounts after you pay them off with a consolidation loan, but don’t go out shopping either.  If you have 3 accounts with balances of $1000 each, the ideal scenario would be to get a new account with available credit of $7000, combine the $3000 leaving $4000 left on the new account, and $3000 on the accounts you just paid off.  This would give you an available credit of $10,000 with outstanding balances of $3000.  Since the credit bureaus like to see a ratio of around 30%, you have just killed two birds with one stone.

Lesson 2 – Payment History


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