Dear Bank of Dad, My credit score is…not great. What’s the best way to increase it? Obviously this takes time. But are there certain practices to definitely avoid, and certain ones to adhere to? — Jeremy S., Cleveland
While it’s true that not all lenders use the same scoring model — some use FICO, for example, while others use VantageScore or other products – there’s a lot of overlap in terms of what these companies emphasize. Regardless of which system the lender uses, you’ll get the biggest boost over time by paying your existing loans on time, consistently. That’s the number one factor for both FICO and VantageScore.
The next thing you’ll want to do is zero in on are your loan amounts. The size of your overall debt matters, but so too does the amount you borrow from individual creditors. To maximize your score, VantageScore recommends keeping the percentage of the credit line that you’ve used – that is, your “credit utilization” – below 30 percent for each account.
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Those are the two biggies. But there are other components of your score that make a difference, too. Among them: the age of your credit accounts. Younger borrowers can sometimes have a harder time earning a high score than those who have years or experience under their belt. It’s a good reason to keep your credit accounts open, even if you have no plans to use them again. You’ll also want to avoid opening a lot of accounts within a short period of time, which increases the likelihood that you’ll overextend yourself.
The absolute quickest way to boost your score is to correct any errors you see on your credit reports. It’s good to periodically review your reports from the three credit reporting agencies -– TransUnion, Equifax, and Experian – to make sure everything looks accurate. If you see anything out of whack, whether it’s a late payment you never made or an account that belongs to someone with a similar name, you’ll want to contact both the appropriate credit bureau as well as the lender in question (the Federal Trade Commission has directions for this, as well as sample letters you can use, on their website).
Once the credit bureau receives a dispute, they generally have 30 days to arrive at a finding. Of course, the more important the item you’re disputing, the bigger the impact on your score should you win.
Dear Bank of Dad, When is it a smart move to refinance my mortgage? Is there ever? — Louis K, San Diego
That depends, in part, on the reason you want to refinance. For example, some borrowers may want to replace an adjustable-rate mortgage with a fixed-rate loan while others might be pulling cash out of their home to pay down credit cards.
In many cases, the homeowner simply thinks their monthly payment will go down if they take out a new loan. Maybe interest rates are lower than they were when they got their existing mortgage. Or they’ve made substantial improvement to their income or credit score that qualify them for a better rate. I’ll assume you’re in this camp, since this represents a large percentage of the refi market.
If a lower monthly payment is what you’re after, you really have to figure out what the breakeven point would be on your new mortgage. In other words, how long would it take for the monthly savings to exceed what you’ll pay in closing costs. When you tally up things like your loan origination fee, title fee and appraisal costs, you could face charges totaling two percent or more of your loan amount upfront.
The only way to know is to contact multiple lenders and compare the different loans. Every time you apply for a refi, you should receive a Loan Estimate, a three-page document that lists the estimated interest rate as well as associated costs of the mortgage.
Let’s suppose you apply for a loan the same size as your current balance: $250,000. Let’s also assume that the closing costs for your preferred lender equal two percent of the loan, or $5,000 and that you’re saving $50 a month by getting a lower rate. You’d need to hold this new mortgage for at least 100 months (a little more than eight years) in order to hit the breakeven point. Conversely, a monthly savings of $100 would cut that time in half.
Some lenders may offer you a “no closing cost” refinance, but what they’re really doing is increasing your interest rate beyond what it would normally be to absorb those expenses. If you can find a “no cost” loan at a lower rate than you’re now paying, that might just be the way to go, especially if you only plan to be in your current home for a few more years.