How to boost credit before applying for a loan...

Question

Hello all,

I just went through this personally so I thought I would share it for anyone else who might benefit. I don't get anything out of this besides knowing it helped someone else. I had good credit but I wanted EXCELLENT credit before applying for a $400K refinance. We all know the difference between 4.2 interest rate and 4.85 can be huge. Especially on a big loan like the ones necessary in California. I read up on it on the myfico forums, it made perfect sense to me, so I said what the hell. Here was my situation, and the steps I took.

Credit Score 709-720 (between the big three)

All bills paid on time

1 AMEX card at with $16K limit nearly maxed out (this was the problem) at 17% APR

After reading up on this, I quickly realized that my credit card being at 90% of it's max was my big problem. The magic number is 20% or lower for your score to be at it's best. However, I wasn't prepared to drop $12-14K out of my savings to pay it down, because when I apply for a loan they will look at your savings account to make sure you have reserves to make at least 3-6 payments worth in there. What to do?

LendingClub.com to the rescue. I don't know these people, nor promote them, but this was the easiest damn loan I ever got in my life. I applied online for a $12K loan or so at like 7 percent over 5 years and I think the whole process took 4 days. I took a picture of my utility bill to prove I was who I said I was and that was about it for verification of funds.

I got the money wired right into my bank account, and quickly put it all on my credit card (don't close out your credit card!) I had a couple grand left on the balance. Within ONE MONTH my credit score jumped from 709-720 range to 769-780 range!

The reason is simple, credit card debt is the worst kind of debt on your credit score. The loan that I took from Lendingclub is just seen as a $225 payment every month. Like a car loan. One last thing to note is the reason I chose to pay it off over 5 years and pay 7% interest instead of 3 years and 5%, is because the MONTHLY PAYMENT would look lower when the lender checked my debt to income ratio. I rather them see a $225 payment instead of a $400 payment that they would use directly against what I can afford as a monthly payment for the mortgage. I of course will pay off the LendingClub loan in 3 years since I'll have more money available from a lower mortgage payment on the refinance.

Hope this helped somebody. I think they loan up to $35K and you need at least a 620 credit score I think.

Chris Mason · Answer

Pretty close to spot on. I don't have access to FICO's secret algorithms, but the software we use which was built by folks trying their best to reverse engineer said algorithms, which I've played with extensively, shows the 'sweet spot' at 1% to 14.49% of utilization for credit card accounts, for almost all credit scenarios.

• It's actually "less than 15%," but I discovered that it rounds up, so 14.49% to be safe... 14.6% will code as 15%, which is not "less than" 15% even though it actually is less than 15%.
• Under 1%, according to the software we use, is the same as no balance/utilization for FICO scoring purposes. 
• The Credco software we use, and I, make no warranty that their efforts to reverse engineer have been successful. This just represents their best effort. 
• If you don't actually need/want to use credit, just buy your significant other something nice once a month, and pay the balance off in full as soon as the bill comes. You will pay no interest if you do this.

I do like the creative solution of using lendingclub.com to solve FICO issues, but folks with tight DTI should be careful. A credit card's i/o payment will often/usually be less than an amortized lendingclub.com payment. Folks should be careful that they don't solve a FICO problem by introducing a DTI problem.

Curtis H. · Answer

@Miguel Nava

I am no credit expert but from what I have read, it's what percentage of the max you are at with each card that matters. Try to keep each card at 20% or below, and you are in good shape. What they are trying to determine is if you are relying heavily on those cards in everyday life. I can see why that would make them nervous.

Curtis H. · Answer

Just an update...Still going up.

As of today I am at 772, 786, 786

This works people.

Marnie L. · Answer

Thanks, Curtis, on some tips on how to get your credit score up, excellent to hear. Unfortunately, I carry too much credit card debt and realize that. I've been trying to pay mine down. It's the debt ratios that matter like some others here have posted regarding credit scores. Thanks for the tips with getting your FICO up, I may be looking for another mortgage/refi within 2 years myself. I'm definitely on the borrowing side for now and am still researching my options.

Answering Koritas' question, I have never used a Peer-to-Peer lending service (P2P) such as LendingClub but I'm familiar with how they work and others I know who have used LendingClub like their service overall. And I know they are quick to loan, once you are approved. I know we now have a lot of P2P lenders to choose from in the 2010s or so. I think I only learned about P2P lending as a term within the past 2 years or 3 years. As an example with Lending Club, you could use them as a lender yourself to lend money in transactions.

Lending Club offers more with personal loans or auto loans (borrowing up to 40K), whereas Lending Tree is geared towards a borrower shopping around for a mortgage. I personally haven't used Lending Tree in a very long time, so I don't know more about the good and bad with it recently.

Thanks for sharing, Curtis.

Roger Wilson · Answer

It's called the "utilization ratio", and used by the credit bureaus to adjust your credit score.  There are different thresholds - 50% and 80%. Meaning, that if you have a credit limit of $10,000 and your balance is $7,500 - your utilization ratio is 75%.  Keep it below 50% to get the best/highest credit score. But DON'T CLOSE THE ACCOUNT!  That will kill your score.

Kimberly Cook · Answer

I spoke with a mortgage lender mid 2016 and was told that according to their loan policies I could have no more than 30% on each card.  It did make a difference if any one card balance was at a higher percentage than that.

Elio Campiolo Jr · Answer

@Miguel Nava if the limits on the cards are all the same, the scenarios you described are the same, as far as credit score is concerned. They are looking at total credit utilized/total credit available, and this number should under 20% (under 10% ideally).

Account Closed · Answer

In order to achieve your maximum Fico score you should allow a balance of exactly $2 to report on only ONE card. If maximizing you score is a priority you should pay your entire bill BEFORE your monthly score cuts with the exception of allowing the $2 to report on one account.

Chinmay J. · Answer

Yeah !! For a lot of people the real issue, however, is lack of self discipline, poor money management. Sure bad things like illness and job loss can happen and ruin your credit, and I sympathize with that, but how many people get stuck in a vicious cycle of one bad decision leading to another, and are never able to come out of it is mind boggling - all due to their poor life choices.

Curtis H. · Answer

@Chinmay J.

Yep you are spot on. This is a solution for people who's only real issue is credit card debt. Which is a large portion of people. Many people pay their bills on time, they just went too far with the credit cards. Easy fix and can pay off big time like it's about to for me when I refinance a $400K loan at the best rate available.

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