Credit Scores: How They Can Be Drastically Impacted

Everyone has heard how important credit scores are when applying for credit. The higher an individual’s scores, the better the terms of financing that are available. Understanding what actions to take to avoid getting a lower score or improving a score is something of a science.

Certainly the area of most concern is payment history. Being late however on a debt is not bad if the payment does not go beyond 30 days late. Only after being 30 days late (from the original due date, not the grace period date) will the institutions report you as delinquent. You will still have to pay the massive late fees however, which is a burden on your cash flow.

If your cash flow simply will not allow you to meet all of your obligations in a given month, pay your real estate debts first, your installment loans next and finally your credit cards. Missing even one mortgage payment in the last 24 months can disqualify you from some lenders’ best programs. The credit scoring systems assign more weight to installment loan delinquency than to credit cards.

Taking a cash advance on a credit card to pay other debt is much better than allowing any delinquency to take place. Although the extra debt will decrease the score temporarily, it will not be nearly as damaging as late payments. You can also recover from a balance increase and quickly erase it, but a delinquency will show on your report for 7 years.

Spread your debt around. It’s not how much outstanding credit a consumer has that is important, it is what amount of available credit is being used. For example, a person with a credit card that has a limit of $4000 and carries a balance of $4000 on the card is going to be severely impacted. While in comparison, the same $4000 distributed at $1000 each over four credit cards that have available balances of $4000 each will get a great score. The difference being the first consumer was carrying 100% of the available balance as opposed to the second one who was only carrying 25%. The logic holds true that if a person appears to need to borrow money, no one wants to loan it. Ideally keep the balances below 30% of the available credit limit on each card.

Have enough funds to pay down some but not all of your high credit card debt before applying for credit? There are computer programs now that allow lenders to input scenarios to determine where best to apply available funds. For example: If a borrower has $5000 to use to improve a credit score, some credit companies’ software will allow the lender to submit a “What If” scenario that will tell the consumer exactly which debt to apply the $5000 to for the best score improvement and it will even project what the new score will be. For example, it may tell you to not pay anything toward an old charge off, while telling you to pay down only $50 on a Visa card. This is a tremendous tool that can create thousands of dollars in savings if leveraged.

Don’t close that credit card account! A seasoned borrower will always score higher. Closed accounts are not given near the historical value as active accounts. Ideally, use available credit to continue to score in this area, but sparingly.

Remember that the credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. It is merely a snapshot of today’s credit profile for any given borrower and it can fluctuate dramatically within the course of a week.