Fixing Your Credit

This is a follow up, or a sister article to my discussion about establishing credit, which can be found at on my blog page. You may want to read that one as well. In these articles you will find time tested and proven advice to improving your credit specifically related to getting the best mortgage loan.

Just to be clear. I am not a credit counselor or credit repair expert. I am a mortgage loan officer with years of experience looking at credit reports and helping people qualify for loans.

A large percentage of people that I talk to on a daily basis have credit that has been damaged in one way or another and it is either keeping them from qualifying for a home loan or causing them to accept terms that are less advantageous than if their credit was better.

I could group these clients into 3 groups: Those who want more options; Those who almost qualify; and, Those who have a lot of work to do.

Those who want more options

These are the potential borrowers who have a good enough score to qualify for some type of loan, but they want to work on their credit to give them more choices. For example, in the case of conventional loans, everything is ‘tiered’. The more you put down, the better your rate. The better your FICO score, the better your rate. Even more significant sometimes is the fact that the better your credit score, the lower PMI rate that you will pay. This can be more significant than the actual impact on the interest rate itself.

Another example, is the buyer who has a score that only qualifies them for an FHA loan, but they would rather have a conventional loan. This example leads me into my first piece of advice.

• Don’t kill yourself to get a small bump in your score. It may not make that much difference in the grander scheme of things.

I’ve talked to a lot of people with a 700 credit score that can only hope to get their score up to 720. This is not usually worth the time – or worse yet – the money that they have to throw at the problem to get results. That money could go to better use. (I’m not a big believer in ‘buying points’, but you could make an argument that money spent on points to get a better rate would be a better investment than paying down a certain debt to try to accomplish the same thing)

That’s all I want to specifically say to this group. Otherwise my advice to the next group is the same for you.

Those who almost qualify

These are the potential borrowers who really need 10-60 additional points on their credit scores to qualify for the program that they want, or any program at all.

You got in this boat by some unfortunate turn of events or by making some bad decisions. You may have some late payments on your record. You may have some collection items. If you have active credit, it may be maxed out. But it’s not TERRIBLE. You’re close to qualifying. There are a few things I can tell you:

• Don’t lose heart. I have helped a lot of people in your shoes. You’ll have to be diligent. You’ll have to work. But you can see results. There is a light at the end of the tunnel.
• You can’t usually do much to fix the things in the PAST. So we’re not going to START with them. You may need to address them, but we will work on other things first.
• I’m assuming that you realize that PAYING EVERYTHING ON TIME is critical. If you can’t do that, nothing else I’m telling you matters.

Besides making timely payments, credit utilization is the biggest thing you can control. What is that? It is the percentage of your credit limit that you have used up at any point in time. This is why credit cards, also known as revolving debt, play the biggest role in repairing your credit. So my next piece of advice:

• If you don’t have at least one credit card, get one (see my establishing credit article for more detail)
• If you do have credit cards, then the biggest thing to improve your score is always to PAY THEM DOWN.

This takes us back to credit utilization. There is an inverse relationship between your credit card balances and your credit scores. If your cards are maxed out or over limit, that is a big hit to your scores. Anything above 50 percent of your credit limit is a negative factor. Then, the closer you get to ZERO balance your scores can improve dramatically. So, to someone who has a few credit cards, paying them down is always the first advice.

If this isn’t enough to get your score to where it needs to go, then we start looking at other things. These things typically have less impact than those above.

• Try to get collection items deleted. Paying off collection items usually doesn’t help much unless you can get the collector to agree to DELETE the collection. Read my lips, marking it PAID does very little. If they won’t DELETE, I would hold off on paying them. If you just paid off a collection and are reading this, ouch, you have no leverage now to go back and ask them to delete your item.

Then, I have one other thing for you to put in the NOT TO DO category.

• Don’t DISPUTE anything that you know is legit.

There are credit repair scams out there that tell you to dispute everything. Wow. Your scores go up a lot. Cool. No, not cool. Bogus. No lender is stupid enough not to see through this ‘technique’. Disputes on non-zero balance accounts – other than medical or police reported identity theft – have to be resolved, or removed, prior to loan approval, because everyone knows that they artificially improve your scores.

So, on the other side of the coin, if you truly do have something that actually should be disputed, make sure that you have 2-3 months to see any results. Sometimes longer. (This is one of the reasons that I recommend to people that we don’t wait till the last minute to check your credit)

To help tie this all together, I can help with a game plan with all of the above. I have a connection that can run a ‘what if’ simulation for you to determine what steps will make the most difference. I definitely recommend doing so before spending a lot of money fixing the wrong problem.

Those who have a lot of work to do

This is the group that needs 60+ points just to tread water. I don’t have any quick fixes for this group of people. A professional credit repair agency may be the best place to start. They will help you dispute as many things as possible, which can result in items being deleted that don’t have a valid paper trail. They can help negotiate settlements on your collections. If you are too deep in a hole, I hate to say it, and a few years ago I thought I would never say it, but some form of bankruptcy may be your best solution.

If you file bankruptcy, be aware that you will need to re-establish credit afterwards. You will need to show that you have taken your second chance seriously and have learned how to handle credit – and debt.

I am not a credit counselor or credit repair expert. The information provided here is based on observations that I have made over the years and information that I have put together from those expert sources. There is no guarantee of exactly how much your credit will improve by following this advice or if it will be enough to qualify for a specific program.


I get asked this question a lot. This is one thing that is lagging behind the ‘recovery’. The
rates are great, there are a lot of homes for sale, but a lot of people have messed up credit – or, in this case, no credit at all, and they can’t qualify for a mortgage.

I talk to a lot of people that say “I’ve just always paid cash for everything”. While this is a very commendable way of making sure that you live within your means, and I would never criticize it, it doesn’t help you when you find something a little too big to pay cash for – like a house.

Just to be clear. I am not a credit counselor or credit repair expert. I am a mortgage loan officer with years of experience looking at credit reports and helping people qualify for loans.

So, how do we establish credit for the first time?

The first thing to know is that not every type of credit shows up on your credit report. Cell phone bills, debit cards, gift cards, rent payments, cable bills, etc. DO NOT show up on your credit report and do not help establish your credit scores. The story that I hear too often is the individual who thought that because their rechargeable gift card said VISA on it that it was a credit card.

The things that usually do show up are: car loans, student loans, and credit cards. And, of course, anything negative will certainly show up even if it isn’t one of the items on the list.

But, we are assuming in this example, that you have no credit at all, and no negative items either (medical bills, satellite TV collections, etc).

So, we are going to focus on the things that show up. But, even better than that we are going to focus on the things that have the most impact. And that means – credit cards. Installment debt is okay (car loans, student loans, etc.), but it doesn’t trigger the credit calculation apparatus the way that credit cards do. Just briefly, that is because the algorithm that they use seems to be most impacted by the concept of “credit utilization”.

Credit cards are the best way to analyze credit utilization because they have both a credit limit and a credit balance. Divide your balance by your limit and you have your utilization in a percentage. A high credit utilization percentage is bad, and a low one is good.

This is what we are going to do.

1. Get a credit card – right away if you haven’t already. The clock is ticking.

This is where I hear “no one will give me a card”. And I say, “if you don’t have messed up credit then someone will give you at least a “secured credit card””.

A secured credit card is basically a starter card with a small credit limit where you are required to keep an amount equal to that credit limit in an account with the issuer. That is how it is ‘secured’, by your ‘collateral’ so to speak. For the purpose of establishing credit, it doesn’t matter how high the credit limit is. It is about credit utilization and that is a percentage. We’ll talk about that in a minute.

Also, if you get the card from a smaller company – like your bank – make sure that they report to all three credit bureaus. The large credit card companies all do, so you are safer there.

2. Use the card regularly.

It is important that your card generates a billing every month. We don’t want it to become dormant. How long can it go before it becomes dormant? I don’t know, but I want to have you create a sustainable habit so that we don’t have to find out. After you close on your home, I don’t care if you ever use the card again!

3. Don’t let the balance get above 30% of the credit limit.

I know that sounds hard if the credit limit is only $300. That means I want you to never have more than $90 on the card? That’s right. Remember, you aren’t going through this process to all of a sudden become popular with all the retail stores that are so impressed with your ability to pay with a credit card. You are doing something VERY STRATEGIC to show the credit bureaus – and my underwriters – that you know how to handle this new toy called credit. You are proving yourself with something small so that you can be entrusted with something big. Got it?

“You mean, spend my whole limit and then pay it down to 30% when the bill comes?”

How can I say this, “”NO, NO, NO, NO, NO, NO!””. You must KEEP the balance low. You never know what day your credit card company will report to the credit bureaus. If your balance is high that day, even if you pay it down the next day, what they report that day is the number you get until the next month. The other problem with the “run it up, and pay it down” approach is that I’ve seen too many people “run it up” and “oops!” they can no longer “pay it down”.

I have been told by credit experts that having a small balance on the report is better than a zero balance. So, a lot of people are told erroneously not to pay off their entire balance when the bill comes. Most companies give you a grace period on interest if your balance is paid in full. So, here is what you can do. When the bill comes, you pay the entire balance and then go out and charge a few dollars on the card. That way there will always be SOMETHING on the card, but the BALANCE will be paid in full. Make sense?

4. Pay your bill – on time.

This may seem like common sense, but I don’t want to leave it out because it is too important. If you do all of the above and then forget to pay your credit card bill when it comes due, then you have just wasted all of this time. Because the one thing more prominent to the credit score calculation than credit utilization – is late payments.

With this approach, you will have 3 solid credit scores within 6 months. It used to be faster, but that seems to be what I have been seeing for the last couple of years. It’s worth the wait. And it is worth the effort.

Yes, you too can enjoy the part of the American dream that is – home ownership!

I am not a credit counselor or credit repair expert. The information provided here is based on observations that I have made over the years and information that I have put together from those expert sources. There is no guarantee of exactly how much your credit will improve by following this advice or if it will be enough to qualify for a specific program.