Before you refinance, clean up your credit score

The better your score, the better your loan interest rate

By Sally Herigstad

To Her Credit

Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets. Ask Sally a question, or read her previous answers in the To Her Credit archive

Dear To Her Credit,
I want to refinance my house very soon before the rates go up. I had never really paid much attention to my credit report until now, but I'm determined to get it in good shape before I apply for a new mortgage. I'm making all my payments on time, and I've even been working extra hours so I can pay off my credit card balances. My question is, how long will it take off for the payoffs to show up on my score? Is there anything else I can do to speed up the process? -- Jessica

Dear Jessica,
You are a great example of how a person can take charge of her credit and make a big difference in a short period of time.

You may not see the results on your credit score overnight, however. According to Barry Paperno, consumer operations manager of FICO score developer Fair Isaac, when you pay your balances down, the credit card companies report your new balances and other information the next time they send a report to the credit bureau. They typically report every 30-60 days, so it could take a month or two for your credit score to reflect your information.

You could get lucky -- if you happen to time it just before they report, you could see the results very soon. "It's like hitting all the green lights -- you could get it in one week," Paperno says.

Your keys to getting into the 700-plus credit score club
Having a solid credit history with a credit score over 700 will open doors to money-saving opportunities -- from low-interest mortgages and loans to lower APR credit cards, better insurance rates and even jobs. Here are a slew of tips that can help get you and keep you in the get and keep a great credit score.

You can also use these tips help improve your score quickly:

• If you have any past due accounts, pay them first.
• Keep your balance down at all times during the month when you're trying to get the best possible score. A large balance, even if you only have it a few days, can show up on your report depending on when the credit card company sends a report.
• Ask your credit card companies to raise your credit limits. This immediately improves your credit utilization percentage.
• Ask your credit card company to report your actual credit limits. Some banks report your highest balance as your limit unless you tell them otherwise. This makes it look like you are using a higher percentage of your available credit than you really are.
• Use your old cards enough to keep them active. Paperno says a purchase or two every six months is enough to keep an account active. There's no need to carry a balance.
• Check your report for any mistakes. Go to the websites of the three major credit bureaus, Equifax, Experian and TransUnion and find out how to dispute any problems.

In addition:

• Avoid opening new accounts. You'll get a temporary ding on your score for opening new accounts, so wait until after you refinance if you're considering a new card.
• Don't close old accounts (in most situations). Closing old ones reduces your available credit, making your credit utilization percentage worse.
• Don't think you have to carry a balance from month to month to show a payment history. According to Paperno, that won't help. Pay your cards off and save the interest.

One thing to note: The lower your score, the more quickly you can raise it by a given number of points. People who have lower scores to start with can expect to see the biggest improvements when they start working on their credit. If your credit just needs a little shaping up, don't expect to see a huge change in points.

You're on the right track. Keep up the good work, and you should soon see a major improvement in your score!

See related: Canceling your credit card and your credit score, Understanding how credit scores work

Gary Foreman, "New Frugal You"

Sally Herigstad, "To Her Credit"

Cathleen McCarthy, "Cashing In"

Jane McNamara, "Let's Talk Credit"

Elaine Pofeldt, "Your Business Credit"

Erica Sandberg, "Opening Credits"

Published: August 15, 2008

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