How to Raise Your Credit Score Before You Buy a Home

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Why credit, and why now

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom, and today I have George Hartmann with me. George is a credit repair expert — and an expert in all things credit — and since it's 2024 we thought: new year, new credit. Let's talk about the tips and tricks that improve your score.

The higher the credit score, the better the interest rate, the more loan programs it opens up to you, and the lower the down payment options available. Credit is just that important. George came to me and said, want to do a credit show again? And I thought yes — because we have been busier in the last 30 to 45 days than we were in all of 2023. People are revisiting the idea of buying, refinancing, getting debt paid off, pulling cash out of their homes. If that's a 2024 goal, now is the time to get credit under control.

George, we've been working together for over a decade. Anything new from the credit bureaus this year?

Nothing major, he says. Since the medical collections change came through, everything is fairly status quo. What has changed is who's calling him: clients with no negative credit at all who don't understand their credit, and are paying him purely for the education, because nobody teaches this and nobody is teaching their kids.

On medical collections: the threshold is $500. Anything $500 or less will not go on your credit report as a collection, and if one is on there anyway, it can typically be removed. Nothing is ever easy to remove — but those are coming off.

On-time payments, and the 30-day cliff

George: once you've got your credit mastered, there are really only a couple of things to know, and the key component of a long-term high score — the kind that gets you back into the 800s — is a history of on-time payments. And on-time means anything up to 29 days late. At 29 days you'll pay the fee, but it won't show up on your credit report. You don't want that habit, but that's the line.

Cross 30 days and it can cost you 60 to 100 points. It affects you for 24 months — that's how long it takes to recover the score fully — and in almost a dozen years of doing this, it's one of the hardest reversals to get.

His own example: after rebuilding his credit into the 730s, he forgot a $6 monthly fee on a card he was keeping open and took a 30-day late for it. Not a purchase. Not a balance. Six dollars. It would have aged off in 24 months; it took him 17 months of work to get it removed.

Q&A: a personal loan to clear credit cards

Annette asks: “Will getting a personal loan to pay off credit card debts affect me getting a home loan within the next six months?”

Debbie: it won't stop you. What we have to account for is the monthly payment on the new personal loan, because that goes into your debt-to-income ratio. But most of the time the minimum monthly payments you're already making on those cards add up to about what the personal loan payment will be, so it probably isn't going to make or break a big difference.

This is exactly why, if you're thinking about buying this year, I want you reaching out for a consultation right away. Not to start a pre-approval, not to pull credit, not to gather documents — just a phone conversation. What's your income? What are those card minimums? What would the personal loan payment be? We do the numbers by hand and determine whether the debt-to-income ratio is better with the loan or without it.

George: the credit side depends. He's not a fan of debt consolidation as a practice — but that's a different thing, and we come back to it later in the show. On an actual personal loan: because of the longer term, the payment usually ends up lower than all the separate card payments combined, and you'll pay a lot less interest. The loan reports as a new account and the payment goes into your DTI, so as long as that doesn't hurt qualifying, it's a good move.

And the balances matter enormously. Credit cards and revolving debt management equal 30 to 35% of your credit score. When those balances come off, you might see a small drop first from the inquiry and the new account — but cards at zero balance is the sweet spot: you save the most money and you maximize your scores.

Debbie: what we typically see is the score jump quite significantly. Same thing when someone uses a home equity line or a home equity loan to pay debts off — scores spike. There's usually a small dip for about 30 days, because your report was pulled to approve the loan and it takes that long for the paid-off cards to reflect. Then they climb.

The trap George wants you to hear

Debbie: what George said matters, so let me drive it home. It is not a good habit to take a personal loan to pay off cards if you're going to turn around and use all those cards again and bring them right back up. Then you owe more and more, you have an outstanding loan and the cards, and it's a vicious cycle. If that's you, maybe you just need to manage what you've got and work hard to pay it down.

When you do take the loan, the mindset has to be: all of my extra money goes toward this loan, and the cards go in the drawer. I keep one card I use when I'm out, because I've noticed that every time I use a debit card — gas station, grocery store, Target — someone seems to steal the number. So I use a credit card for safety and pay it off at the end of every month, and the rest sit unused.

George: credit cards are one of those things you have to trick yourself on. He's disciplined himself to the point where zero balances are an addiction. When a card hits $500 he sends a payment no matter where he is in the cycle, because $500 is a number he's used to — it's been a car payment, an RV payment, a rent payment. At $800 he gets squeamish. And here's what happens to most of us at $1,000: Friday comes, you had a rough week, you and your spouse go out to dinner on the card, money's a little tight so groceries go on it too, we'll pay it next week — and then you turn around and there's five grand on it.

Q&A: hard inquiries and soft inquiries

Michael asks: “Soft credit checks — what are those all about, what are they looking for, and do they really have an impact on your credit score?”

George: there are hard and soft inquiries, and inquiries are one of the five sections of your report that affect your credit. Hard inquiries take a few points each time, and the fewer you have the better your credit does over time. Soft pulls are the online ones — experian.com, Credit Karma, where you the consumer are checking your own scores, or where an insurer runs one.

The easiest way to tell which you're dealing with: if you're going to receive something tangible from them running your credit, it's typically a hard pull.

Debbie: when a company says “soft inquiry to find out what you're qualified for,” that's essentially a pre-qualification — they pull a quick score from the bureau and decide what to offer you. That doesn't change your score and won't show up on the report other lenders pull. You might see it if you have a monitoring service, and it'll be labeled. But if you move forward with what they offer you, they still have to run a hard inquiry before approving it.

George's five rules

I asked George to write these down before the show so I could read them to you — and so my radio listeners get all five even in a 30-minute cut.

One: on-time payments. On-time payments are crucial to building a strong credit profile. A 30-day late payment hurts your scores by 60 to 80 points, takes a full 24 months to recover, and is an exceedingly difficult removal. Never make a payment past 30 days from the due date.

George: to build to 750, 800, and hold it, they're looking for that history. Late here and there and paying the fee is survivable. Past 30 days is a tough removal, a 24-month recovery, and even longer before you see the really high scores. Put them on autopay as much as you can and don't miss them.

Two: revolving accounts and balances. Credit card balances equate to 35% of your credit scores. Any balance over 20% of the limit starts to lower the scores. Having three to five open credit lines is ideal.

George: three to five accounts, all under 20% of their limits. As soon as you go over 20%, scores start to plummet. Be very careful with small-limit cards while you're rebuilding — a $300 or $500 card can be maxed out in one shopping trip.

And his tip for getting to three to five if you don't have them: become an authorized user. A husband adding his wife to a card, or in George's case, a friend who added him to two cards he'd held for ten years, both with $10,000 limits and zero balances. That history landed on George's report and his scores went up almost 100 points.

Debbie: we love authorized users. We talk about it constantly during consultations when we're looking at whether a score can reach the next loan program. If you don't have much credit and want to know more about it, call the office.

Three: inquiries. Consumer credit reports like experian.com and Credit Karma are considered soft credit pulls. If you are applying to acquire anything tangible, that would normally be a hard credit pull. Hard credit pulls lower your scores.

George: they don't give you a lot — three to five hard inquiries a year is about where they're at. And nobody reads the fine print, especially on a car: the application says they will shop you for the best rate. If you walk in with an 800 score you get A-plus paper, they run it once, and you're done. If you're at 650 or 680, they'll go to their prime lender, and if that doesn't take, the next one, and the next — they might run it ten times before someone buys the loan.

Debbie: for your protection, multiple inquiries within a 30-day period for the same type of purchase count as a single hit. This comes up constantly — someone talked to another lender, had their credit pulled, then their agent sends them to us, and they panic about a second pull. Yes, you'll see the other lender's inquiry on the report, and mine, and lenders can see who pulled it. But the actual hit to the score happens with the first lender. You can be pulled multiple times inside that window as long as you're shopping mortgage against mortgage. I tell people to finish inside two to three weeks rather than testing 31 days, because a fresh inquiry after the window drops the score again.

The same grouping applies to auto loans. Credit cards are a different story — George has seen each card application count as its own hit, because they're separate entities even though you're applying for the same kind of product. So don't apply for multiple credit cards at once.

Four: credit scores. The algorithm is different for each sector in calculating credit worthiness and risk — consumer, auto, mortgage, solar and so on.

George: it's one of the most asked and most confusing questions, and he's been doing this 12 years after ten years in mortgages. The consumer scores — Credit Karma, experian.com, the identity services — are generous, and he'd put the gap at 20 to 50 points. The underlying credit is the same; what differs is the algorithm. Another reason scores differ: some creditors only report to one or two of the three bureaus, so the three reports aren't identical. And the simplest way to explain it: apply for a credit card in the morning, a car at lunch and a mortgage at dinner, and every score will be different, because each is risk-based for that sector.

Debbie: so the score you see when you log into your Capital One, Discover or American Express account is not the score you'll see when you apply for a mortgage, or a card, or a car loan. I get this all the time — we pull a report, the score is different from what someone is used to seeing, and they get upset. I don't get to decide what your score is. If I did, everyone would have an 850 and we'd give everyone a loan.

Five: derogatory credit. All derogatory credit can and should be disputed for accuracy before settling any accounts. Verified debts can typically be settled for approximately 50%.

George: about 98% of the time, his clients' derogatory credit is genuinely theirs — mistakes we made, or just life happening. That was him in 2007; by 2009 his credit was in the garbage and he had to start from scratch. What he was taught then: never pay something until it's verified, because there are so many mistakes on the bureaus and you don't want to pay something that isn't correct.

Once verified, a debt sits in one of two stages — a charge-off with the original lender, or, if it ages long enough, a collection. Counterintuitively, collections can often be negotiated and removed faster and more easily than a charge-off still with the original lender. Most verified items settle for about 50 cents on the dollar, and they do need to be settled to move your credit forward. You don't need to pay anyone to do those negotiations — he gives clients the information and works through it with them.

Debt relief is not debt consolidation

Debbie: I want to go back to Annette's question, because we started to roll into debt consolidation and I need to separate two things.

Taking out a loan to pay off what you owe, and then making payments on that loan — taking full responsibility for every dollar you used and paying it back — is not what I'm about to describe. What I'm describing is what companies advertise as debt relief, or sometimes consumer credit counseling, and sometimes as debt consolidation with no loan involved. If nobody is pulling your credit to give you a loan, you are not looking at a debt consolidation loan. You're looking at something completely different.

We've had quite a few clients recently who signed up for this. Things have been expensive, inflation has been high, gas has been astronomical, and a lot of people have leaned on credit cards and lived paycheck to paycheck. So more people went to these programs thinking it was the solution — and they are an absolute mess right now.

George: most of these people's debts aren't even late yet — some are still making payments and still have good credit. Those companies typically advise you to stop making your payments. So immediately you have late payments on your report, then a charge-off, and eventually they settle the debt for less than you owe, which reports as a settled charge-off. It's something you could do on your own, with the same negative marks, without paying them.

Debbie: here's what I hate about it. You sign up, you make a monthly payment to this company, and you think you're making a loan payment toward your debts. In reality they're collecting that money and putting it into an account with your name on it — it's your money — and they are not paying a single debt. So all of your cards go 30 days, 60, 90, 120, charge-off.

George: and the hit is so extreme at 30 days that 60 and 90 roll about the same. It stays there until you catch up and start to recover.

Debbie: so now you've got multiple accounts with multiple lates. Someone who was at 660 or 670 — typical for a person who's maxed out on their limits but has always paid on time — is suddenly in the 450s, 500s, 520s. Night and day. And even if you settle everything at 50 cents on the dollar and technically got a deal, how long does it take to dig out? You have to build new credit and make payments on time for how long, George?

George: they look for three to six months minimum of current on-time payments, sometimes up to a year. And two years before those late payments stop affecting you at all.

Debbie: so it's two years, plus rebuilding, plus keeping accounts open and paid on time. It can literally be years before your score returns to where it was before you stopped paying. There are people who are so tapped out that it genuinely is the only option, and I'm not looking down on anyone for taking it — but George is telling you that you can do it yourself without paying a company, and if you can avoid the scenario at all, avoid it.

Before you stop making payments, before you let your report go, before you start thinking about bankruptcy — call us. If you're a homeowner, the odds you have equity right now are very, very good. If your income is documentable, your credit is clean, and the income supports it, a home equity line, a home equity loan, or a full refinance to pay debt off is a great opportunity. I can't promise a loan for everyone — if income can't be verified, or the debt is beyond what the income supports, that's a different story. But at least talk to us. And if we can't do it, call George and see what he thinks before you start letting things go.

George's RV story

George's closing example, on what knowing your own credit is worth. After years of rebuilding into the 790s, he went to buy an RV. Normally you walk onto the lot, find something, and say run my credit. But he knew he had put $298 on a $300 credit card — and the bureaus were reading that single card as 98% utilization, even though he had plenty of others. It dropped him to 711 from the high 700s.

So he asked the dealer to quote him at his current score. At 711: 10% down, 5.4% interest. He said no problem, I'll call you in ten days when that card posts at zero. Ten days later the score came back 791, and the dealer offered him money back and a rate of 2.49% — A-plus paper, no argument, no negotiating. He put the difference at roughly $10,000 out of pocket, before you even count what 2.49% instead of 5.4% saves over a 15-year loan. Now imagine that on every transaction across your lifetime.

Wrap-up

George Hartmann's site is creditrepairin30.com — the 30 is the numeral. He offers a complimentary consultation with a full analysis of your credit report before you commit to anything, so you know exactly where you stand and which direction to go. He read his direct line out on air as well for the radio audience.

Thank you, George. And thank you all for listening. We'll be back next Wednesday right here on YouTube at 1 p.m. Pacific — that's when we go live. To get the link so you don't miss it, text the word MOM to 844-935-3634, that's 844-WE-LEND-4. If you're ready to start 2024 with a purchase or a refinance, go to mortgagemomradio.com; it's the same number to reach the office. Talk to you all real soon.