Have bad credit? Join the club. Despite the fact that the average FICO credit score in the United States is 699, which falls into the good category, there are plenty of consumers struggling to improve their respective scores.
According to BadCredit.Org, 20 percent of Americans own subprime credit scores. Those scores, ranging from 580-669, are considered to be in the “fair” category. In short, you can get a loan for a car, or perhaps a credit card, but prepare to pay a far greater interest rate than those with better credit scores.
And that’s fair. Those who have demonstrated the ability to pay back what they borrow, in full, and consistently on-time should be rewarded.
Going further down the rabbit hole, 11 percent of Americans fall into the lowest tier, the poor and very poor range from 300-579. There are even less options here for prospective borrowers.
Those who fall into the bottom two categories of poor and fair know something needs to be done to repair those scores. But what? And how? And is it even possible.
Jay Davis has those answers, and he should know them. The branch manager at Developer’s Mortgage Company in St. Clairsville, Davis has been helping people repair their credit so they can realize the dream of owning a home for years.
It’s his passion and has been for 30-plus years in the financial industry.,
“To start, you need to get in touch with a FICO Certified Professional, which are hard to come by,” Davis said. “I am one of only 200 that I know of really. Most place you see on TV or hear their ads, they are not looking out for your best interest and will charge outlandish fees before they even help you.
“This violates the Credit Repair Organization Act. If they charge you a fee upfront and monthly, then run.”
Davis noted that credit is “like a fingerprint for each individual” in its uniqueness, but how it starts, and stays in the top tiers, is basically the same formula.
That formula is thus:
– 35% of scores are based on payment history over the last 12 to 24 months. You can’t be 30 days or more late on any bills that report to the credit agencies.
– 30% of scores are based on credit card ratios of balances to limits where 1% is the best for scores and go down as you reach 9%-19%-29%.
– 15% of scores are based on length of credit history. You need 12 months of credit history before you can get a mortgage.
– 10% of scores are based on new credit. Anything under 12 months old.
– 10% of scores are based on type of credit. Car/Personal/Home/Credit card
Also, consider this nugget when pondering how to start tackling a poor or fair credit score.
“The easiest fix with 95 percent of people is paying down their credit cards to one card with a one percent balance of their credit limit,” Davis said. “The more cards, the more of a balance you can have on any one card or combined.”
What About Debt Consolidation?
A debt consolidation loan is an excellent option for working to pay down debt and improve one’s credit score.
They allow you to borrow one lump sum that goes directly toward paying off all other debt, whether that be credit cards, loans, perhaps debt in collections (which further beats down one’s credit score).
But there is a caveat to this plan. If a consumer waits until their credit score really tanks before considering a debt consolidation loan, they may end up paying a considerably higher interest rate for said loan.
“A debt consolidation loan is the best route to go,” Davis admitted. “Unfortunately, by the time your cards are maxed out, your scores are very low, so you must pay a higher rate of interest on the loans.
“The best option is to go to your local credit union and see what options they have. Credit unions have a lower rate cap and score levels than your big bank or finance companies.”
There are other companies, both local and online, that can provide loan assistance for those with poor credit. But the interest rates are even higher and, if possible, paying down debt in slower fashions for a few months, waiting for the score to rise, and then applying for a debt consolidation loan would be beneficial because of the better interest rates.
The Debt Effect
Davis sees the difference a great, or poor, credit score can have on a daily basis. Since he works with mortgages, he’s used to determining loans for people seeking to borrow large sums of money.
Houses aren’t cheap, and often times are paid back during 20-to-30-year periods, the typical lifespan of a mortgage.
But how big of a different can a great, or fair credit score make, when it comes to an interest rate on a mortgage?
In short? Pretty big.
“Credit is the number one determinate of what type of mortgage you will get,” Davis said. “The difference between a 580, 600, or 620 score to a 700, 720, or 760 can be hundreds of dollars a month for the same loan amount.
“It is best to reach out to a direct lender that handles all the agency loans like Fannie Mae, Freddie Mac, and Gunny. My branch of Developer’s Mortgage in St. Clairsville can help you with any issues or loans.”
While you’re working to build back credit, free apps like Credit Karma can help you see what’s causing your score to go up and down. But he cautions banking what your present score is based off the score Credit Karma gives. It’s more of a representation than an accurate score. Plus, it doesn’t include Equifax, one of the three main credit monitoring services.
No matter what you use, Davis cautions to never pay to see your scores or for a monthly service.
“You can go directly online and see what is wrong with your scores and just make sure you pay off collections and follow the ratios,” Davis said. “Never pay for any scores or for monthly services to see you scores.”
