If you have clients who are struggling to get their finances in line while preparing to buy a home, here is some advice you can give them to help get their credit scores in good shape and keep them healthy moving forward.

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How many buyers have you met who walk in your door with a rotten credit rating and confidently promise to fix things up before they apply for a mortgage?

That’s never a good sign, even in times like these when first-time buyers can plan on hunting four months or longer to find a property they can afford and would buy. Many of those buyers who improve their credit temporarily return to their old habits after they close on their first home.

Too many lenders have been burned by buyers whose excellent credit scores evaporated after a year or so. Now lenders are doing something about it.

Welcome to the age of trended credit

Today’s algorithms measure credit over just three to six months of behavior. “Trended” credit takes a much longer view of how consumers manage their credit and debt over time. It paints a more accurate picture of what a responsible borrower looks like.

The difference between traditional credit and trended credit is like the difference between a snapshot and a video.  A snapshot captures a single moment frozen in time. A video shows what happened before and after the picture was taken. 

Borrowers who don’t care about their credit management until they start planning for a big loan to buy a house, a car or a college education will not fare well under trended credit.

Fair Isaac Corporation, the company that creates FICO scores, is introducing an update in its scoring model.  It’s a “suite” of two FICO products FICO 10 and FICO 10 T that provide lenders with both a traditional score and a trended credit score that tracks behavior over two years. 

These new models will be available to lenders by the end of 2020. However, it will probably take several years until trended credit is widely used in the mortgage business.

Here are six suggestions that will keep both your own and your clients’ credit in good shape all of the time.

1. Stay below the 30% threshold

A little alarm bell goes off in the credit bureaus that keep score on credit behavior when your balance on a single card hits 30 percent of your approved amount.

Many borrowers think that they can fill their cards close to the approved limit and all will be well. Wrong! Your credit score takes a hit the minute you hit that 30 percent mark.

Review your credit cards, and be sure you are below that mark on all of them.

2. Pay more than the minimum

Ain’t revolving credit great? You can buy a suit for $800, but you’ll only get a bill for $5 a month.

Minimum payments are seductive. If you just pay the minimum, you aren’t paying off your debt, just the interest on your debt. The principal will still be there next month and the month after that. Over time, you are making your lender rich. Paying the minimum is better than paying late or not paying at all. 

On the other hand, if you pay more than the minimum every month, even if you pay just a small amount over the minimum, you are moving in the right direction. 

3. Close accounts you don’t need, except for your oldest

There is such a thing as having too much credit, especially if your available credit is out of proportion with your income. Lenders are conservative people, and they don’t like the idea that a borrower might go wacko and use all the plastic in their wallets.

Then they might not be able to pay the mortgage. Close out those dusty cards in the top drawer of your dresser, and don’t apply for new credit until you can afford it.

However, always keep your oldest card and pay it off promptly whenever you use it. Lenders like to see responsible behavior over a long period.

4. Get help to make sure you pay on time

There’s no excuse to miss a payment or make a late payment today.

Sign up to receive a notification from your creditor, your bank or one of the free credit management sites such as Mint, NerdWallet or Credit Karma.

When you are trying to get in shape to buy a home, you simply cannot afford a late payment — ever.

5. Consolidate your killer accounts

So you got six months credit free or cash back for a year when you signed up for some of your cards. Now the grace period is over, and you’re getting socked with an APR that would make a rich man howl.

Find another interest-free card, and pay a modest transfer fee. Or take out a low interest personal loan, and pay off your balance. Then close out those toxic accounts.

Sure, you still owe the same amount of total debt, but now you have a fighting chance of paying it down. Which you will, won’t you?

6. Reintroduce yourself to cash

Some financial advisers tell you to hide your plastic in a drawer and live on a cash basis. They are like weight loss gurus who say you must live on kale and wheat germ if you want to lose weight.

It just ain’t gonna happen for young Americans raised in a society where you can buy stuff with a smartphone. So don’t go totally cold turkey.

Withdraw a limited amount of cash each week, and use it to buy the gas, groceries and other daily stuff you used to buy with plastic. Make a game of seeing how far and how long you can stretch your weekly cash.

You’ll find you spend less and add less debt.

A final tip: After you’ve sacrificed for many months to put a shine on your credit score and you’ve saved for a down payment and closing costs, the finish line is in sight.

With a U-Haul and a little help from your friends, you’ve got the move under control. You are handy enough to make your new home feel like it’s yours. Your mortgage is approved and closing day is here.

Don’t even think about breaking out the plastic for a big purchase before everything is signed and closing is complete.

More than one lender has checked a borrower’s credit the night before closing and canceled the loan if new debts pop up or a score plummets suddenly.

Steve Cook is editor and co-publisher of Real Estate Economy Watch. Visit him on LinkedIn and Facebook.

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