by Susan Johnston
When the 2012 Summer Olympics opened in London last month, thousands of athletes from around the world came to compete in pursuit of that elusive gold medal; their years of training, sweat, and hard work culminating in a few key moments of competition. Outside of these elite athletes, most of us will never feel the rush of completing a perfect dismount from the balance beam or finishing the 200-meter breaststroke ahead of an internationally ranked rival.
But that same hard work and tenacity could be applied to boosting our credit score in anticipation of a major life event. Adrian Nazari, founder and CEO of CreditSesame.com, which offers free credit-analyzing tools for consumers, sees parallels between Olympic athletes' preparations chasing a gold medal and consumers preparing their credit score to apply for a mortgage or a refinance. "They want to make sure that their credit score peaks when they want to make a big financial decision," he says. "If they don't have the right credit profile, that could cost thousands of dollars."
Here are seven strategies for improving your credit in anticipation of a loan application or refinance:
1. Start early. "Just like an Olympic athlete who dedicates himself to practice way ahead of the Olympics, consumers should start early," says Nazari. Credit report errors could take several months to clear up, so check your report well in advance of applying for a mortgage or car financing. If you spot mistakes like an incorrect balance or a missed payment that you actually paid on time, Nazari suggests contacting a credit bureau. "Say 'look, I made the payment on time' or 'my balance was reported wrong,'" he suggests. Collect any documentation that proves your case as backup.
Buying your FICO score from MyFico.com is also smart, according to Liz Weston, author of Your Credit Score
and The 10 Commandments of Money, because that's the score that financial institutions actually use to determine creditworthiness.
2. Lower your credit utilization ratio. Credit utilization - that is, the ratio between your credit card balance and credit limit - is a major part of your credit score, so bringing down that ratio by lowering your balance can help boost your score. Thirty percent or less used to be a good standard, but Beverly Harzog, an independent credit card expert and consumer advocate, says to shoot for 10 percent if possible.
But don't be too quick to close old cards. "If you close a credit card account, you take away some of your credit limit, so that can make your utilization ratio go up," says Harzog. "If there's an annual fee and you want to close that card, put that off until you've got approved for a mortgage."
Requesting a credit increase could help lower your credit utilization, but if you have a high balance or other potential red flags, the credit card issuer may actually lower your limit. "If you've got a pretty clean slate and you're not in debt, you'd have a good argument to get an increase," says Harzog. "But if you're at the other end of the spectrum, don't try that. It could very likely make things worse."
3. Keep high balances off your card. Even if you pay off your credit card balance every month, large purchases can still haunt you due to timing issues. "The balance that's reported to credit bureaus is on a random day from before the end of that statement period," says Weston. "You could have paid the balance off before and it still wouldn't say zero." Leading up to a mortgage application, it may be wise to avoid large purchases--or to at least pay cash to keep them off your statement.
4. Don't make hard credit inquiries. Hard inquiries on your credit - such as applying for a retail credit card - can lower your score temporarily, so avoid those activities in anticipation of a mortgage or loan application. "At a department store, you're looking to get 10 percent off that, but to creditors, it looks like you're shopping for credit," says Nazari. "You could wind up paying a lot more in interest over time compared to the 10-percent discount you could get from the store." Soft inquiries - such as checking your own credit - do not impact your score.
5. Make timely payments. Pay your bills on time to demonstrate your creditworthiness. According to Weston, "a single skipped payment can knock 110 points off your score." Also be vigilant about any bills that might wind up in collections. Weston says that medical bills in particular may slip through the cracks due to complicated insurance and hospital billing systems, so consumers may not know about the bill until they see it on their credit report.
"If you've gone to the hospital and haven't gotten a bill, call and ask about it," suggests Weston. "If you're calling the billing department of your medical provider and your insurance company, it's unlikely it will go to collections."
6. Stay in your current job if you can. Switching jobs right before you apply for a mortgage or refinance could be a red flag for lenders. "If you're currently employed and your plan is to change jobs, stick with your current employer," says Harzog. "Don't make any major lifestyle changes until you get approved. You want to look as stable and as risk-free as possible."
7. Don't stress over less than perfection. Olympic athletes strive for gold, but of course, silver and bronze are also impressive. Once you reach a certain level, increasing your credit score doesn't improve your interest rate. "If you're in the market for a mortgage and you're over 740, you're going to get the best rate," says Weston. "With other kinds of loans, you might need a 760 or above. There's no point in having a score of 850 or even a score over 800. You don't get any bonus points for being super high."