If you need to raise your credit score fast, don’t lose heart – it’s possible.
Credit card balances have a significant impact on credit scores.
As a loan officer I regularly bump into the following statements. “I have perfect credit, I pay my credit cards off every month” “my credit score is low due only to past late payments.” Unfortunately many times there are other areas impacting the credit score. This article will discuss credit score impacts resulting from credit card usage.
Credit score formulas are a closely guarded secret. Exactly how a score is determined and the score model is constantly changing. What we will reveal is knowledge based on real world examples. When discussing specifics of what affects a credit score among credit report professionals we do not receive consistent answers. Multiple weak areas of credit have a more significant impact on credit than the sum of the individual impacts. The following will address the impact of credit card use on credit scores. The score model constantly evolves.
The area of credit card usage as it relates to credit scoring is consistently underestimated and misunderstood. It is also one of the easiest components of a credit report to adjust. It is very surprising for a many consumer to find out the extent credit card usage affects their credit score. The higher a balance is in relation to the credit limit on a specific account the more impact on the credit score. A maxed out or over limit card will have a significant impact on the credit score. The total credit used across all accounts has an affect usually to a lesser degree.
The rule of thumb used to be that credit card usage on any single credit card above 50% of the available balance would start to impact credit scores. I am currently seeing any activity can have an effect on the credit score. With usage above 20% of available balance there is frequently a noticeable effect. As usage ratios rise the effect becomes more significant. Multiple weak areas of credit have a more significant impact on credit than the sum of the individual impacts.
Commonly heard statement:
“This does not apply to me I pay off my credit card every month on time.”
Typically a creditor reports to the credit repositories once per month. Credit card balances that are reported on the credit report are the balances as of the day of reporting. Most creditors report within a few days either side of the 1st of the month or on the statement date.
Even if you pay off your credit card monthly a significant balance may be reported and reflected in your credit score. For example if the creditor reports the day before your payment posts your full amount will be reflected as the balance on your credit report.
Insider Tip – For borrowers that have significant monthly credit card usage and pay off the balance each month consider paying off your credit cards several times during the month to always keep the balance low. Many creditors report balances around the first of the month or the statement date. Keeping the balance low at all times will help insure favorable reporting.
Am I stuck with my credit score?
Through a process called rapid rescoring we can obtain immediate credit score changes upon receipt of official documentation of changes. As a mortgage professional we have options on how to handle clients with credit scores that can be improved. We do not offer credit repair services however we can run additional reports giving specific information that will give guidance to optimize your score. Every credit report we run has a “potential score indicator.” Many lenders run the credit report and will only use the initial score received. Other lenders will not want to spend the time or risk a time delay that may be caused by working to improve a credit score. We don’t feel that is adequate customer service. Mid Oregon Lending will let you know the impact of your credit score as it relates to loan products and review options and time lines for potential improvement.
The earlier in the home buying process you receive an accurate credit score from a mortgage lender the higher your chance of benefit. Sometimes this is the difference that will allow you to obtain an approval. Other times the score improvement can save you $1000s in your mortgage cost. In our current mortgage world of risk based pricing sometimes 1 point difference in your credit score will result in $1000s in added financing expense.
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