How to raise your 650 credit score to 800

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Did you know that a 650 credit score is the most common FICO score in America today? You may be wondering what makes up a credit score, and most importantly, if there is anything you do to improve your average credit score of 650 to an excellent score of 800.

There are many components that make up a credit score (or FICO score). These include the length of time you’ve had your credit accounts, your debt to equity ratio, the type of debts you’ve had, and your payment history. Let’s explore each to give you a better understanding of these metrics for score calculation.

Credit History

If you have been borrowing money for over 10 years you are in good shape. If you don’t have much of a credit history, then each year your accounts are open will add to your credit score.

Debt to Equity Ratio

This factor is a simple mathematical calculation. If you have a $10,000 credit limit on your credit card and you have $6,000 on that credit card, your debt to equity ratio is 60%. If you have multiple accounts, such as a credit card, car loan, school loan, and a store credit account, you simply add up all your debt and compare that to your overall available borrowing power. If you are looking to improve your 650 credit score to the 800 range you will want your debt to equity ratio around 30%, meaning that 70% of your borrowing power is unused.

Types of Credit Accounts

A variation in credit account types is essential to improving a credit score of 650. Most people in this range will have only one credit type, such as credit cards. By adding an auto loan and a personal loan, your credit account history will diversify, which will have a positive impact in improving your credit score.

Payment History

Perhaps the most important factor for improving a 650 credit score is a consistent history of early or on-time payments. By paying on-time it shows your creditors that you are able to manage your debt, giving them confidence that if you apply for more lines of credit you are likely to be a good account. If you have been late on payments in the past, a disciplined 3-6 months of early payments should improve your credit score.

By following the four factors outlined above, you should be well on your way to improving your 650 credit score, and perhaps one day seeing a FICO score of 800 or higher.

How to secure a mortgage without a credit score

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Ideally in today’s tough mortgage market a credit score of 700 or higher is required to apply for a home mortgage. If you have an average credit score of 650 or lower, you have some work to do, but if your score is in the 700 or 800 range you shouldn’t have much trouble, assuming you have a steady job history of 2 years or more and no history of major financial trouble such as a bankruptcy.

But what if you don’t have a credit score? You may think that everyone has a credit score, but in actuality if you have never had a credit card, car loan, student loan, or personal line of credit, you have no FICO score. Typically this scares off most mortgage brokers today, however there is a method that you can ask your bank to look into if you find yourself without a credit score.

This method is called manual underwriting. You will need to collect all of your financial data for at least the past two years, including rent receipts, records of your utility and cable bill payments, and your paystubs from your job. The mortgage underwriter will then review all of your records in detail to determine if you are a candidate for a loan towards purchasing your first home. The main thing the underwriter is looking for is a consistent pattern of stability. Do you pay your rent early or on time? Do you hop around from one apartment to another, or is your living situation relatively stable? Do you have a good account history with your utility and cable company? And most importantly, is your job situation stable with a consistent and dependable income?

If you can prove all this to the mortgage underwriter, you shouldn’t have much trouble getting a home loan with the right lender.

It is important to note that if you have no credit history, then you should not apply to take out a new loan or credit card if you are thinking about purchasing your first home. By opening a revolving line of credit such as a credit card, you will generate a small credit score, which will hinder the manual underwriting process. As building a credit score takes time and years of consistent payment history, it is better to have no credit score than a brand new one when applying for a home mortgage.

Learn more about manual underwriting here.

The hidden dangers of credit cards

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While credit cards in and of themselves aren’t bad, consumers should realize that they change the way you think about money and spending. Many studies show that people subconsciously “feel” cash purchases more than credit purchases. These studies indicate that the same part of the brain that feels pain triggers when a cash exchange is made. This was shown not to occur when an item was purchased via credit card or a line of credit.

So what is the difference? Both cash and credit cards are connected to your personal finances, and each impacts them in the same way. Mathematically this is correct, but physiologically we do not view it as simple math. You can feel cash in your hand, feel it in your wallet, make the association that the numbers in your bank account translate to these green bank notes that you have in your possession. A credit card is a distant and impersonal transaction. You don’t need to count the bills, double check for accuracy, and hesitantly hand the cash over the counter to complete your purchase. With a credit card everything is abstract; a number is shown on a cash register, you hand them a card, the card is processed and an account other than your bank account reflects this number as a debit to your credit line. The entire process has no involvement and takes little to no thought processing. When you can’t feel the purchase you don’t think about it, and when you don’t think about it naturally you spend more.

If you are skeptical, try budgeting your grocery bills for next month. Then go to your bank, withdrawal this amount in cash, and keep an envelope in your purse or wallet marked “groceries”. This money can only be used for grocery purchases, and when you have spent your last dollar there is no more money to spend that month. This may seem like a silly exercise, but the first time the cashier rings you up for $200 in groceries and you need to count out ten $20 bills, (or hand over two $100 bills), you’ll “feel” your grocery purchase for the first time and think twice about your food budget.

This will not only teach you to carefully consider your purchases, but it will also help you to budget and keep more of the money you make. A proper budget and understanding of your spending each month will free up your personal finances and lead to less stress in your home.For more information about how credit cards affect your credit score visit Your 650 Score.

Should I Borrow Money from my 401k to Pay off Debt?

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The goal of getting out of debt; paying off your credit cards, school loans, auto loan and eventually your home mortgage is a wonderful aspiration. The financial peace and freedom that accompanies a debt free live is incomprehensible until you are there yourself. However, oftentimes people will get so passionate about paying off debt that they forget to do simple math and end up making stupid decisions.

Let’s first address the debt you are looking to pay off. In today’s market, a typical home mortgage is around 4-5% interest, some of the lowest rates our country has ever seen. The average auto loan in America is 7%, and federal student loans are about the same. Credit cards come in at the highest rates, with 10-20% interest being standard depending on the card and it’s benefits. In your noble quest to pay off your debt you see the mountain you are climbing and these snares of interest percentages along the way. Yes debt is bad, and yes, high interest rates are hurting your overall financial picture and should be eliminated as quickly as possible. So it seems like drawing cash from your 401k to pay off this debt is a smart and logical thing to do.

Let’s take a step back and look at your 401k for a minute. In today’s market it is not that difficult to find a growth stock mutual fund that yields an average rate of return of 10% over the past 20 years. If you are 35 year-old and have $50,000 in your 401k, this will be worth $991,870 at retirement age of 65. That $50,000 would turn into almost 1 million dollars in 30 years, and that’s assuming you never contribute another dollar to your account! If you pull that $50,000 out to pay off your debts, it would most likely take you several years to build up your 401k back to that level. Assuming you contribute $5,000 per year back into your 401k accounts, that same $50,000 base over the 20 years left to the retirement age of 65 would now only be worth $366,404 (all assumptions the same). That means that those 10 years of compound interest lost cost you $625,466 of interest income in your retirement account. Perhaps I have your attention now?

Now we need to look at taxes and penalties. If you draw from your 401k before the age of 65, you will be penalized a 10% fee for the early withdrawal. Then a capital gains tax is applied to that amount, as the IRS sees it as income. The majority of Americans are within a 25% tax bracket, so that rate would be deducted from the $50,000. The 10% penalty + the 25% tax rate = 35% of your hard earned savings go to the US government. 35% of $50,000 is $17,500, leaving you only $32,500 of your nest egg to pay off debt. It’s almost as if you’re asking, “Should I borrow money at 35% to pay off debt that averages to about 7% interest?” When it’s put that way it sounds incomprehensible, and that doesn’t include the lost compound interest opportunity of your 401k funds.

So while I applaud your honorable desire to pay off your debts, borrowing from your 401k to do so is an extremely foolish idea.