Tips to boost credit score enough to qualify for a mortgage
Just need a few more points? Watch credit utilization, become an authorized user
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Dear Speaking of Credit,
Hi, my husband and I are in a situation where we are now looking to buy a home. We have been approved for an FHA mortgage, however, he is a veteran and we are both trying to get approved for the VA loan. When our credit was last checked in May of 2015, my middle score was a 595 and his was a 611.
We were told to pay off all but $40 on a $300 credit card that was maxed out. In addition, we were told to add my name as an authorized user to the credit card to help improve my credit score. I was also told to use the credit card that I have and pay it off when the bill came so I did just that. Bought something for $100 and paid it when the bill came. Since I am 25 points away and my husband is 9 points away from qualifying for the VA loan, how likely is it that doing the things mentioned above that our credit score will improve to the numbers needed? -- Dana
It sounds like you're clearly on target toward obtaining that VA mortgage loan and are just a few points shy of qualifying. It also sounds as if you have received some good advice as to how best to obtain those points, though I have to confess to liking the first two suggestions a lot more than the third. I'll tell you why.
1. Pay off all but $40 on a maxed out card with a limit of $300. Paying down a maxed-out card is always good for your score. But why stop at a $40 balance that will lead you to a utilization percentage of 13 percent when paying just a little more to reduce that percentage further can potentially take your score higher?
When it comes to credit utilization percentages, the lowest single-digit numbers -- 1 percent to 9 percent -- are best for your credit score. With that in mind, and with every point being critical, I suggest leaving about a $10 balance -- 3 percent utilization -- on your next statement. This will be the account balance appearing on your credit report, which means it will also be the amount that, when divided by the $300 credit limit, will determine the card's utilization percentage affecting your score.
Then, pay this statement balance off the following month and repeat this process every month going forward. As you continue the monthly use of the card, feel free to charge as much as you like while making multiple payments throughout the month if needed. Just don't let the balance on your statement date amount to more than 9 percent of your limit.
2. Add your name as an authorized user. If you're not already on the card, becoming an authorized user is a great way to add a few points to your score. That is, as long as the account has a virtually spotless payment history. If not, adding your name to it could hurt more than help the situation.
Another precaution to take anytime you add yourself as an authorized user is ensuring that the utilization percentage on the card is lower than your other cards, which should be the case with this one after that maxed-out balance is paid down.
Looking to the future, know that should the time come when you no longer need or want to share the history of that account, it will be easy to remove yourself. Simply contact the card company stating that you no longer wish to be an authorized user, and your name can be taken off.
3. Use your card and pay it off when the bill comes. While you certainly didn't hurt your score by charging $100 on your card and paying it off, I fail to see what benefit your score received from doing this.
I can only guess that the person giving you this advice was under the impression that somehow the act of charging and then paying the balance in full your score would result in more points. If so, this idea that increased credit activity increases your score is a mistaken notion that, while not doing your score any good, doesn't do it any harm.
This is not to say, however, that activity plays no part in your score. There are a couple of indirect ways in which recent card activity can help your score in the long run. Both have to do with how card balances and limits can impact that ever-present set of scoring calculations -- credit utilization:
- Utilization not only measures the proportion of available credit you're using, but also indirectly tells the score whether the card has been used recently -- a good thing in the eyes of the score. I say "indirectly" because in the absence of any other way to detect account activity from a credit report, the scoring formula uses the presence of any balance amount above $0 to indicate recent card use.
- At least some occasional card activity -- every six months or so -- is recommended to prevent the card issuer from closing the card due to inactivity. This is important because once a $0 balance card is closed, for whatever reason, the card is excluded from all credit utilization calculations.
As for how best to manage this card of yours that apparently has been lacking in recent activity, it's simple. Just follow what was discussed in No. 1, above, by allowing a very small balance to appear on your statement each month.
You now appear to have all the tools and direction you'll need to see those scores meeting the VA loan qualifications within the next few months. I wish you well.
See related: Help your credit score rebound after a fall
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