Your Credit Report Part II: To Do and Not To Do (Protect Your Credit!)

July 11, 2011 at 6:29 AM Leave a comment

In Part I of this series we learned just how important our credit rating is and the far-reaching financial consequences of our credit score. Now on to the good stuff. What can we do to improve or maintain our credit rating? What actions should be avoided?


Do pay your bills on time,even those bills that might not be automatically reported to the credit bureaus such as rent, insurance, and utilities. Payment history affects about 35% of your score.	Don’t allow taxes (whether real estate or income tax) to go to lien. Tax liens have a huge negative impact on a credit score, as do 90 day lates.
Do have active credit card accounts. Showing that you can manage a revolving line of credit is an important piece in the overall credit history.	Don’t open too many new accounts all at once. It is important for some time to pass to prove that you can handle the new debt.
Do keep your credit card balances low. One important aspect of your score is the ratio between the balance owed and the amount of available credit. The more that is available and untapped is a sign of debtor restraint. It is best if you can keep your balance at 30% or less of your maximum credit available.	Don’t close out all your credit card accounts. It may seem that paying off a card and closing it would be the “responsible” thing to do, but that can distort the balance-to-limit ratio.
Do keep in mind that credit card companies can choose to drop a credit limit on a whim. What might be a good ratio today could look like excessive debt in the future.	Don’t carry large balances on your credit cards. The minimum payments required have increased dramatically recently, and these payments can have a serious impact on your borrowing power when analyzing debt-to-income ratios for mortgage qualifying.
Do mix things up. Having some installment debt (auto, student loans) and a major credit card along with a retail (store or fuel) card will give the lender a clear idea that you can manage different types of debt.	Don’t sign up for all those retailer’s incentives. The next time you are offered a 10% discount on your $80.00 purchase, remember that you will be authorizing that cashier to check your credit. This will count as a recent inquiry into your credit report AND make it look like you are desperate for credit, reducing your credit score.
Do know your score. Check your credit report at least annually at www.annualcreditreport.com. Often enough, there are serious reporting errors on a credit report. Vigilantly correcting these as they come up can have you better prepared for when you are ready to get a mortgage loan.	Don’t shop for a loan too long. It may seem smart to go from lender to lender, shopping for the best loan terms. The credit reporting agencies will distinguish what type of credit you are seeking (car dealers when car shopping, mortgage lenders when house hunting). If 14 days pass, and your credit is checked again for the same type of debt, the credit agency will assume, often unfairly, that you have been turned down for your initial application and had to apply elsewhere. When that next report is pulled your score will likely have decreased.
Do pay your hospital bills and utility bills. Even a small balance of $25.00 can be very detrimental to your credit report if it goes to a collection agency.	Don’t co-sign for friends. Not only might their monthly payment count in your debt ratios and reduce your borrowing power, but any late payments on their part will adversely affect your credit history.
Do be pro-active. Build up a savings or investment account to cover at least 3 months’ of payments and expenses. Even better to have 6 months in reserves.	Don’t avoid your creditors. If you are experiencing difficulties with your payments, ask them to work with you. From the bank’s perspective, silence = complete unwillingness to repay the obligation.

When it comes to your credit report and score, it is important to remember that some of the best and worst things you can do are counter-intuitive. True, there is a logic behind credit scoring, but it is not always the same logic we employ in our day-to-day decisions. When dealing with credit matters, getting help from an advisor who has in-depth training in credit reporting, along with industry perspective, can be invaluable. MDI Mortgage of Maine has helped hundreds of applicants understand, improve, and maintain their credit scores. We would be pleased to extend that assistance to you, as well.

~Sherri Dyer, Advisor & Mortgage Maven