Photo: misterbisson | Flickr
When it comes to cultivating a credit score, you’ve probably got the good citizen routine down cold.You pay on time, try to wipe out the entire balance every month and never close too many accounts at once.
Beyond the basics, though, many consumers are still in the dark about what makes their credit scores go up and down.
“We have had so many people over the years who don’t understand what goes into a credit score,” says Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies. “They just live with the old wives’ tales.”
Consumers understand that the credit utilization ratio — the total amount of revolving credit someone uses in a month, compared to the amount of available credit they have — is a major factor in calculating a score.
But did you know that it’s often calculated from the total on the statement date, not the due date? So even if you pay balances in full every month, a card issuer may report a balance. And that can hurt your credit score.
Here are five ways you can use that bit of knowledge, along with some other expert know-how, to boost your credit rating.
1. Pay bills before the statement date
Typically, the balance as of your last statement date is the balance that will report to the bureaus, says Barry Paperno, consumer operations manager with myFICO.com, the consumer division of FICO, the company that created the FICO score. So if you pay most of the bill before the statement date, you can lower your utilization rate. And that can equal a higher credit score.
“How much you owe is 30 per cent of your score — and the utilization ratio is a large part of that,” says Paperno.
If you’re one of those folks who charges a balance every month but pays it off and can’t understand why your score isn’t higher, it could be that your utilization ratio is what’s depressing your score, he says.
This might not work with every card. Some lenders don’t use the balance on your statement date when they report to the bureaus. Instead, they select another day and report the card balance on that date instead.
Paperno’s advice: Call your lender to ask when the balance gets reported.
2. Make multiple payments
Another way to lower the balance on your statement date is to make periodic payments throughout the month.
If you use your card throughout the week for everyday expenses and pay it off every Friday, you’ll cut the amount of credit you’re using at any one time. Check with your card issuer to learn how they handle multiple monthly payments.
“Basically, the lower the balance on your credit report, the better,” says Paperno.
What you need to know: Your card could place a limit on the number of times you can pay in a month, he says. While all will take two or three payments, if you are paying weekly or more, you want to call and make sure they are set up to handle that many multiple payments.
3. Ask for a ‘good-will deletion’
If you only have one or two bad marks on your credit record, you may be able to get them expunged, says John Ulzheimer, president of consumer education for SmartCredit.com, based in Costa Mesa, Calif.
Say you’ve paid late, but have an otherwise spotless credit history. You can ask your lender for a “good-will deletion,” he says. “It doesn’t mean it is wrong or was reported incorrectly. Essentially, what you’re doing is asking the creditor to cut you some slack.”
The good news: “You’ll be surprised how many times they will,” says Ulzheimer.
The bad news: “If you’re habitually late, it won’t work,” he says. This is strictly for folks who err rarely.
As for whom to ask, start with customer service. But you may have to go up the ladder. And make your request as soon after the error as you can. “The sooner, the better,” he says.
But it can make a difference in your credit score. “If you have two or three bad things on (your) credit report, and you get one or two removed through good-will deletion, you will be surprised how quickly your score will go up,” Ulzheimer says.
4. Pay for removal
If you have an account that’s gone into collection, sometimes collectors will agree to remove the debt from your credit report if you agree to pay if off.
“You’d be surprised how many collection agencies will stop credit reporting in exchange for payment,” Ulzheimer says.
But before you agree to or pay anything, you want the arrangement in writing. Get a letter on company letterhead that spells out they will remove the debt from all three major credit-reporting agencies.
The process is sometimes called “pay for deletion,” Ulzheimer says. And “while credit bureaus frown on those arrangements, it’s not their data that’s being reported.”
5. Protect yourself in a short sale
After a short sale, the mortgage lender often will report to credit bureaus that the home loan was settled for less than the full amount. In addition, it can also note the amount of the deficit as “balance owed” on the credit report, even though the obligation has been finalised and no additional money is owed.
In other words, if you have a $300,000 mortgage and sell your house for $250,000, the bank could report a balanced owed of $50,000.
While the short sale will damage your credit score dramatically (as much as a foreclosure, according to examples recently released by FICO), you can mitigate the damage slightly by arranging with the lender not to report a balance owed.
The best time to negotiate this with the lender: before or during the short sale process, says Ulzheimer. While you can attempt it after the fact, that’s not as practical.
“After it’s been paid, the lender starts to lose interest in speaking with a former customer.”
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