With Wall Street investors suddenly feeling squeamish about risk in the wake of the mortgage crisis, lenders are returning to prehousing boom qualification standards — including requiring borrowers to have good credit.
Mortgage companies are very reluctant to give a subprime loan — designed for higher-risk borrowers — to anyone with a credit score below 620, said Greg McBride, senior financial analyst at Bankrate.com. And some won’t touch anything below 660, he said.
“There are no quick fixes,” McBride said. “There is no liposuction for credit scores.”
But there are steps potential home buyers, looking to qualify for a loan or a better interest rate, can take to improve their credit scores.
Experts say the best thing a person can do is pay bills on time.
How a person pays his bills and the amount of money he owes relative to how much credit he has available count as 65 percent of the score, McBride said.
Other factors considered are the length of credit history, the mix of credit like car loans, mortgages and credit cards, and new credit applications.
Taking out too many new credit applications shows a person is in the market for credit and there may be problems, McBride said. On the flip side, having a number of credit cards isn’t necessarily a problem because it increases the amount of available credit relative to a person’s debt.
If a person is shopping around for the best rate on a particular loan and does it within a 30-day period, then multiple applications are counted as one inquiry on the credit report.
People looking to improve their credit scores should also focus on paying down debt and increasing their savings cushions, McBride said.
“It’s OK to take six months with the idea of putting yourself on better financial footing before taking the plunge into homeownership,” he said.
Developing a budget using a simple Excel spreadsheet is a good way to track where money is going, said Patty Park president of the local chapter of the Financial Planning Association. Many people underestimate what they’re spending on items, such as eating out, Park said.
“I think it’s really hard to make purchase decisions if you don’t know where you’re spending your money,” she said.
If someone is making late payments, he should contact the lender, Park said. Many companies will make deals with borrowers because they want to maximize what they’re going to recover, she said.
Another important step to improving a credit score is regularly reviewing your credit report.
Each person in the United States is eligible to get a free copy of his or her credit report once every 12 months from the three major credit reporting agencies: TransUnion, Equifax and Experian. You can request a free report online at www.annualcreditreport.com.
Look for inaccurate information, such as late charges on bills that were actually paid on time or new accounts that you didn’t open, Park said.
“It’s a great way to catch potential identity theft,” she said.
If you only need to up your credit score by 20 points, simply correcting inaccurate items on the report might get you there, said Travis Plunkett, legislative director for the Consumer Federation of America.
The passage of time is also an advantage to borrowers.
The longer you’ve had established credit, the better, which can be a problem for students, first-home buyers and immigrants, Plunkett said.
The negative impacts from a hit to your credit report diminish over a seven-year period and become less severe each year, Plunkett said.
“Whereas if it happened last week, you’ve got a problem,” he said.