Q&A: Get your credit score ready for the home-buying process

Dear Liz: What score do you need to be approved for a mortgage? Is 520 even close? If not, how do I get that score higher quickly?

Answer: A score of 520 on the usual 300-to-850 FICO scale is pretty bad. Theoretically, you might be able to get a mortgage if you can make a large down payment, but you’ll have more options — and pay a lot less in interest — if you can get your scores higher.

That, however, takes time. You need a consistent pattern of responsible credit behavior to start offsetting your mistakes of the past. If you don’t already have and use credit cards, consider applying for a secured credit card, which requires a cash security deposit, typically of $200 or more. You’ll get a credit limit equal to your deposit. Using the card lightly but regularly, and paying in full every month, can help your scores.

A credit builder loan, offered by credit unions and the online company Self Lender, is another way to improve your credit while building your savings at the same time. The money you borrow is put into a savings account or certificate of deposit that you can claim once you’ve made 12 monthly payments. Making your payments on time helps improve your credit history and scores.

Taking a year to build your credit also would give you more time to save for your down payment and for closing costs. Rushing into homeownership is rarely a good idea, so take the time you need to get your financial life in order first.

Q&A: How to improve your credit score and whether you should bother

Dear Liz: My credit scores are good, but I was wondering if there is a way to bring your scores to 800 or more if your income isn’t that high. I always pay my bills on time and my credit card off each month. In the last two years, I took out a small loan to pay off a car, then paid off furniture and now am paying on six new windows for my home.

My FICO scores run from 747 to 781. I’m told the reason they aren’t higher is that the number of accounts I have is too low and that my credit report shows no recent nonmortgage installment loans or “insufficient recent information” about such loans. I’m pleased that my scores are that high, but they say you get the best low-interest loans with a score over 800.

Answer: It’s not true that you need FICO scores of 800 or above to get the best deals. The best rates and terms typically are available once your scores are above 760 or so on the usual 300-to-850 FICO scale. Some lenders set the bar lower, to 740, 720 or even less. Also, your income is not a direct factor in your credit scores — although having a higher income can lead to creditors granting larger lines of credit, which could favorably impact your scores.

If what you’re after is bragging rights, there are some ways to boost good scores even higher.

The easiest may be to make more frequent payments on your credit card to reduce your credit utilization, or the amount of available credit you’re using. If your issuer reports your statement balance each month to the credit bureaus, paying off what you owe a few days before the statement closing date will reduce your apparent credit utilization. Just remember to pay off any remaining balance once you get your bill.

Another approach would be to apply for another credit card and spread your purchases between the two cards, which also can lower your credit utilization. Either way, continue to pay your cards in full, since there’s no credit scoring advantage to carrying a balance.

Taking out another installment loan could boost your scores, but it’s not smart to borrow money you don’t need if your scores are already good.

Remember, too, that there are many different credit scoring formulas. There are different versions and generations of the FICO score as well as FICO rivals such as VantageScore.

If you achieve an 800 with one type of score, you might not with another — and whatever score you achieve, you might not keep for long. Your scores fluctuate all the time, based on the changing information in your credit files.

It’s worth the effort to improve bad or mediocre scores because those can cost you in many ways such as higher interest rates, higher insurance premiums, bigger utility deposits and fewer options for cellphone service. Improving already good scores doesn’t offer much if any payoff, so it’s usually not worth incurring extra costs to do so.

Q&A: Here’s how to find that annual free credit report

Dear Liz: Please tell me the website for the free credit check. At a department store checkout counter, a stranger’s name came up connected to my cellphone number. I think I should check my credit reports, but I don’t want to pay for what I understand I can get free.

Answer: It’s entirely possible a clerk simply made a mistake in entering another customer’s phone number. But you should be checking your credit reports regularly anyway, and this is as good an excuse to do so as any. The federally mandated free site can be found at www.annualcreditreport.com. Searching for “free credit reports” can turn up a number of other sites, so make sure you use the correct one.

Q&A: How to protect your financial data in the wake of the Equifax breach

Dear Liz: Do I have the right to notify the credit bureaus that I do not want any of my financial information stored in their files? They don’t seem to be that secure. I rarely borrow money and the three financial institutions I deal with have all the data they need to lend me money if I need some. I do finance a car on occasion, because if they want to lend me money at less than 1%, why not?

Answer: The short answer is no, you have no right to stop credit bureaus from collecting information about you. You also can’t prevent them from selling that information or keeping it in inadequately secured databases.

One thing you can do is to freeze your credit reports at all three bureaus to prevent criminals from using purloined information to open credit accounts in your name. But that will cost you.

The only bureau currently waiving the typical $3 to $10 fee for freezing credit reports is Equifax, the credit bureau whose cybersecurity incident exposed Social Security numbers, dates of birth and other sensitive identifying information for 143 million Americans. The other bureaus, Experian and TransUnion, are still charging those fees.

You’ll have to pay an additional $2 to $10 each time you want to lift those freezes, which you’ll probably need to do if you apply for new insurance, apartments, cellphone service, utilities and, of course, credit. Financial institutions may indeed have plenty of information about you, but probably wouldn’t lend you any money without access to your credit reports or scores. Freezes also are a bit of a hassle because you need to keep track of a personal identification number, or PIN, to lift the freeze.

Just in case you weren’t irritated enough by this state of affairs, understand that freezes won’t stop other types of identity theft, such as someone getting medical care in your name or giving the police your information when they’re arrested. Still, instituting freezes is probably the best response to the most devastating breach yet.

Q&A: Making sure your free credit report really is free

Dear Liz: Please tell me again how to get my free credit report each year.

Answer: You can get a free annual look at your credit reports from the three major credit bureaus at www.annualcreditreport.com. If you search for “free credit report,” you may wind up at a look-alike site, rather than the federally mandated one. A good clue that you’re on the wrong site will be if you’re asked for a credit card number.

Your free reports don’t include free scores, which are the three-digit numbers lenders and others use to judge your creditworthiness. Your bank or credit card companies may offer free scores, or you can sign up with one of the many sites that offer them. Keep in mind that there are different types of scores, and the one that you’re seeing may not be the same as the ones your lenders use.

Q&A: How long will a tax lien linger on a credit report?

Dear Liz: You wrote an article about how the credit bureaus are removing civil judgments and tax liens from people’s credit reports. I’ve been denied credit due to a few tax liens. Creditors won’t negotiate, even though the IRS has already deemed me unable to pay due to my disability. (I’m receiving Social Security disability income.) My question now is, how can I be sure it is being removed? Do I need to call the bureaus? Order another credit report?

Answer: Your unpaid tax liens may disappear, or they may not.

Starting in July, Equifax, Experian and TransUnion began removing liens and judgments when those records lack enough personally identifying information to ensure that the negative marks wind up on the right people’s reports. Another new requirement is that the records be properly updated, so that accounts that have been paid or resolved aren’t still showing as unpaid.

The error rate for these records was high, leading to many complaints, disputes and lawsuits. The bureaus expect to purge virtually all civil judgments but only about half of the tax liens.

If your liens aren’t purged and you can’t pay them, you may have to wait a while for them to fall off your credit reports. Paid liens are subject to the seven-year limit on how long most negative items can appear on credit reports. Unpaid liens can technically remain indefinitely, although the bureaus typically remove them after 10 years.

Q&A: Changing credit scoring formulas will help some — but not everyone

Dear Liz: I read that the credit bureaus have started deleting black marks from people’s credit reports. This is good news for me. I have never been late on a house payment in 30-plus years, but my credit is in the low 600s due to a loan I co-signed for an ex-girlfriend who has been chronically late.

Answer: The records the credit bureaus are deleting won’t help improve your scores.

The three bureaus — Equifax, Experian and TransUnion — are removing virtually all civil court judgments and many tax liens from credit reports. Tax liens result from unpaid state or federal tax bills and civil judgments are court rulings from lawsuits filed over old debts, unpaid child support, evictions and other non-criminal disputes.

Judgments and liens caused a lot of disputes and complaints about accuracy because the records were often missing key identifying information and weren’t regularly updated. The bureaus are removing the records that don’t include minimum identifying information such as Social Security numbers or dates of birth in addition to names and addresses. The records must also have been updated within the previous 90 days.

The deleted records are expected to lead to small credit score increases for most of the 12 million to 14 million people who have such black marks on their credit reports.

Your issue is different. Because you co-signed, the loan appears on your credit reports as well as your ex’s. Every late payment hurts your credit scores. If your ex had simply stopped paying, your scores would have plunged even more — but then would have begun to improve as your responsible use of credit began to offset the default.

After seven years and 180 days, the defaulted loan would no longer show up on your credit reports or affect your scores. Because your ex keeps paying, albeit late, your credit scores sustain fresh damage each time. Each late payment also resets the clock on how long the negative marks show up on your credit reports. You won’t begin to get relief until the loan is paid off or refinanced.

Q&A: So many credit scores — here’s how to get yours

Dear Liz: You recently discussed FICO scores. Please let me know how I can get mine. My bank says it can only give my husband his score because he is the principal on our account.

Answer: Remember that you don’t have one FICO credit score, you have many. Lenders use different versions and generations of the FICO formula. In addition, FICOs will differ based on which credit bureau was used. So your bank may give your husband a FICO Bankcard Score 2 based on information from Experian, while an auto lender might use a FICO Auto Score 5 from Equifax. These scores almost certainly will differ from his FICO 8 scores, which are the most commonly used scores. The FICOs for credit cards and autos typically are on a 250-to-900 scale, while FICO 8 is on a 300-to-850 scale.

Anyone can get free FICO 8 scores based on Experian data from Experian’s consumer site, Freecreditscore.com, and from credit card Discover at Discover.com. Several other credit card issuers — including American Express, Bank of America, Chase, Citi and Wells Fargo — offer FICOs of various kinds to cardholders.

If you want to see a broader range of your FICO scores, you can buy a three-bureau report from MyFico.com for about $60 that includes FICO 8s, FICO 9s and the most commonly used scores in mortgage, credit card and auto lending from each bureau.

Q&A: How to improve your FICO score

Dear Liz: My FICO score is just under 800. The reason given that it is not higher is that I don’t have any non-mortgage leases. What would be the cheapest way to remedy this without buying something expensive?

Answer: When you get your credit scores, you may be given sometimes-vague reasons for why they’re not higher or lower. The “reason code” you saw probably said something like “no recent non-mortgage balance information.” What that means is that you haven’t been using revolving accounts such as credit cards. To get higher scores, you’d need to dust off your plastic and use it once in a while. (You don’t need to carry a balance to get or keep good scores, however. You can and should pay credit card balances in full each month.)

Any improvement in your scores is likely to be modest, however. Your numbers are already high and the factor known as “mix of credit” — which means responsibly using both revolving and installment accounts — accounts for just 10% of your FICO scores. Plus, there’s no real point in having scores over 800, other than to brag about them. Once your scores exceed 760 or so, you’re already eligible for the best rates and terms.

Q&A: How a short sale can short-circuit your credit score

Dear Liz: In 2010 I was laid off from my construction management position. I was unable to find work for 28 months. The bank tried to foreclose but I was able to arrange a short sale of my home in March 2012. Shortly after that, my unemployment benefits ran out and I was unable to pay my obligations (two credit cards totaling around $9,500).

I did get a good job in June and in July worked out payment plans to get the back debt caught up. I have since paid this debt off (November 2016) and pay any credit card balances in full every month. I also pay my car loan on time using automatic debits.

My credit scores remain stuck in the 675 to 690 range and none of the steps that I take seem to help. I know that after seven years the negative information regarding the mortgage and the credit card past dues will drop off. Since I did the short sale and not a foreclosure, though, why are my credit scores treating me as if I did a foreclosure or chose bankruptcy?

Answer: A bankruptcy theoretically slices more points off credit scores than either a foreclosure or a short sale. The hit you take from a short sale, though, depends in part on how your lender reported the transaction to the credit bureaus.

If the lender reported a deficiency balance — which is essentially the balance of your mortgage that wasn’t repaid after the sale — the impact will be similar to a foreclosure. If the lender opts not to report the balance, the credit score impact will be somewhat less. After the foreclosure crisis started, some lenders opted not to report those balances as an incentive for homeowners to arrange short sales rather than let their homes go into foreclosure.

You’re already doing most of what you need to do to repair your credit, including having different types of credit (credit cards are revolving accounts while car loans are installment accounts) and paying those debts on time.

One tweak you can try is reducing your credit utilization on those cards. If you regularly charge 30% or more of your credit limits, try reducing your charges to 10% of those limits or less. It’s good that you pay in full, but the balance that’s used in most credit scoring formulas is the one the credit card issuer decides to report. It’s often, but not always, the amount that shows as your balance due on the statement closing day. Reducing the amount of credit you use may boost your scores a few more points. Other than that, you simply have to wait for time to pass and for your responsible credit use to undo the damage of the past.