Credit Series Part 5: Managing Your Score

In part 1 of this series on credit we talked about how important credit has become in surviving the current home depreciation environment and avoiding the ARM Reset Foreclosure Trap. In part 2 of the credit series we looked at the elements that comprise your credit score. Part 3 covered improving your score on your own and outlined the importance of credit management and protecting your credit report. In part 4 examined the pros and cons of using and outside credit repair service. Our conclusion was that it probably made sense to try to fix credit errors yourself. In the conclusion of the series we look at the best ways to manage your score and ensure you’ll keep your score heading up, up, up! Here is a recap of the series so far and where we are at to date:

Credit Series Overview

1. Why credit is so important
2. Understanding elements of credit
3. Improving your score organically
4. Improving your score using 3rd party help
5. Managing your score

The Goal

Over the past four articles we’ve examined credit and how your actions can improve or damage it. We’ve given you some tools to repair and improve it. Today we will give you some tips for maintaining your score and improving it. The main goal of this series is to help people with short-term adjustable rate mortgages improve their credit enough to enable them to refinance in to a better loan when the first rate adjustment date arrives. This is the best chance you have to avoid the ARM Reset Foreclosure Trap if you are planning on staying in your home.

You can’t control the value of your home, you can’t control the interest rate your loan will reset to when the fixed period ends, you can’t (assumably) pay down your mortgage balance significantly; the one thing you can do is improve your credit. You do this by managing your score.

Manage Your Score

Managing and improving your score is kind of like exercise. The more you use it, condition it, and look after it the better and stronger it becomes. If you go to the gym, eat well, keep track of your weight, caloric intake and improvements at the gym you become healthier and stronger. Same goes for credit.

Track Your Score

It is important to keep track of your score, its changes and performance and whether it is increasing or decreasing. The best way that I have found to monitor your score is through myFICO.com’s Score Watch program. This program monitors your Equifax credit score daily and your FICO score weekly. It does the work for you. For about the cost of 2 cups of Starbucks a month you’ll be alerted to any changes to your credit report and score. This is a valuable service that anyone who wishes to invest in protecting and improving their credit score should use.

I’ve stated through out this series that my wife and I both used the Score Watch program while improving our credit and it helped me add well over 100 points in the last year through proper management and payment history. Please note again that I am an affiliate of myFICO.com and do get compensated for sales through my site. However, I have been promoting myFICO.com for over 3 years now and have only recently in the last two months become and affiliate. It is a great service.

The nice part about this service is that if anything derogatory appears on your credit you can research and dispute it right away to have it removed. You can also take a proactive approach to managing your scores. If you see your scores decline you can look at your report and determine what may be negatively impacting your score.

Proactive Management

Just like anything else of great import in life; it is better to be proactive about your credit score than reactive. The worst feeling in the world is applying for credit and not knowing if you’ll be approved or not. Not knowing your score puts you at a disadvantage. It gives people power to tell you what you do and don’t qualify for. It puts you at the mercy of people who would try to take advantage of you by your ignorance in this arena. Know your score. It is as important as your social security number, and more important than your drivers license number.

Take these steps to actively manage your credit:

1. Sign up for Score Watch from myFICO.com
2. Watch for any changes in your score, positive or negative
3. Maintain a close eye on your credit card balances - keep your balances ideally under 33% of your credit limit and definitely under 50%
4. Always make your mortgage payment - missing a mortgage payment can be the single most devastating thing you can do to negatively impact your credit score
5. Sign up for automatic payments on all revolving accounts - this simple move is guaranteed to improve your score; especially if you have a tendency to be lazy with bill payments
6. Promptly follow up with all disputed items - work quickly to remove erroneous items from your credit report and payment history
7. Get everything in writing - it is extremely important that you keep a written record of any and all disputes you have regarding your report and payment records on your credit report. Keeping written documentation will help you whenever another party or opinion is needed to settle a credit matter.

If your score is going down

If your score is dropping it is important to obtain a copy of your credit report and ascertain why the score is declining. Remember your score can be impacted negatively by any of the following:

• Too many inquiries on your credit report
• Balances on revolving accounts of more than 50% of your credit limit
• Reporting of a late payment on your mortgage or other reporting accounts
• Too much debt, for example another car, second home or other large debt item
• Public judgment, tax lien, unpaid parking tickets, etc.

When you review your report take a look at what may be dragging your score down and work to rectify it quickly. Here are some common ways to rectify a score drop:

• If your score is hit by excess debt it may be because an old mortgage or automobile account is still showing as active even if you’ve already refinanced that old mortgage, or turned in a leased vehicle or sold your old car. While you no longer have that debt the bureau may count it against you if the account is not properly recorded as closed.
• If you’ve been shopping excessively for items that require a credit inquiry your score will take a temporary hit. Take a break from running your credit for about 3 to 6 months to allow your score to recuperate. Too many inquiries make you look desperate for credit - which hurts your score. Time will clean this up.
• If your balances are getting large it may make sense to open another card and transfer some of the debt to the new card. This may be effective if you only have one or two cards with high balances. Having a third may allow you to return your debt levels to under 50% of the credit limits. This takes discipline however; do not use the new card to rack up additional debt.

Essential Reminders

1. Do not miss a mortgage payment, please. This is one of the worst things you can do. There was a study recently that showed Americans are more likely to make their credit card payment than their mortgage payment. If you are in a short-term adjustable ARM and are planning on refinancing in the next 12-18 months this is a terrible decision.
2. Know what is on your report. I’ve seen loan applications declined because borrowers didn’t know that their gym membership was reporting on their credit and they neglected to pay their gym dues. I’ve seen a late library book from a University library shave 30 points of a credit score. Don’t let trivial items hurt your chances at getting a great loan.
3. Fight erroneous information. No one is going to clean up your credit report for you with out you being vigilant about keeping it clean and pristine. Dispute errors quickly and in writing to document your efforts. Your credit is your responsibility.

Avoiding the ARM Reset Foreclosure Trap

If you refinanced to a high loan-to-value (85% or higher) loan over the last two years; and chose a short-term adjustable rate mortgage in the process - these articles are for you. Regardless if your loan expires in 6, 12, or 18 months it is important to begin working on your credit now. The reason is simple. The combination of falling home prices, rising interest rates and tighter underwriting guidelines will make high loan-to-value loans available only to those with the best credit. If you are not in that group you will have to deal with the consequences of an ARM Reset and payment adjustment which can be financially devastating.

Work now to avoid that trap.

First time homebuyers

This advice applies to you as well. By managing your score before you begin the home buying process you will ensure yourself access to the best rates and loan programs on the market. The more programs you have to choose from the more manageable owning your first home becomes.

Conculsion

Credit is essential. Access to credit is a major determinant to your success and quality of life; especially in regards to your home. Please understand that recent events in the mortgage market make it essential-now more than ever-to improve your score to protect yourself from deleterious changes. I hope that you are able to use some of these concepts and skills to raise your score. Using these same skills I personally raised my score over 100 points in two years and 200 points in a little over 3 to put me in the best position possible for my financing needs. You can do it too.

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[Source: Blown Mortgage]