Dennis' Mortgage Blog

Perhaps the primary component to lending today is a borrower's credit score, commonly referred to as the "FICO" score (FICO stands for Fair Isaac, COrporation-the company that created computerized credit scoring), and perhaps no component of the loan process is more misunderstood and filled with misinformation than the credit score.  As a result I spend time with most clients discussing their credit report, items that are of concern that they can make corrective action on--not just derogatory reporting items but also items to increase security and reduce chances of credit theft--and explaining the credit score.

For those reading not yet familiar with credit scoring, your credit score is a number calculated by several different factors based on how you pay your debts, how much debt your have, when you obtained the debt and if you are looking for debt.  Your credit score is like bowling not golf: the higher the score the better.  At the bottom of this post is a link to the myfico.com site and it has a pie chart showing what your score is based on.

"I don't want you to run a report because it will lower my credit score."

Perhaps the number one myth for credit scores and one that was somewhat true when credit scoring first came out but not so much anymore--especially if I am obtaining your credit report for the purpose of providing a mortgage, or mortgage information.  In the booklet linked below from myfico.com is an explanation of how inquiries from potential creditors affects your credit score.  Understanding that many consumers shop or research more than one lending source before obtaining a mortgage or auto loan they credit scoring program takes this into account and allows "score free" (my term) inquiries for the consumer.  As well, while you may provide me a score from another lender or directly from the credit bureau(s), until I have my own report I cannot issue a pre-approval letter.  Why? Primarily because our system is set up to interact with every major lender and both Fannie Mae and Freddie Mac allowing us to upload borrower information into their programs for credit approvals and conditions--they will not take the upload unless we have credit information. 

This does not mean however that you can go out and have a bunch of reports run from a bunch of different sources.  Inquiries from companies that provide revolving credit (Citi, Capital One, etc) count against your score and each additional inquiry takes increasingly more points off your score.  According to Fair Isaac consumers with more than six inquiries on their credit report are eight times more likely to file bankruptcy.

It is okay to shop for a mortgage (as much as I would appreciate if you just use me!) or an auto loan, it is not okay to shop for credit cards.

"How can I raise my score?"

Reduce your credit.  The number one factor in determining your credit score is your credit history, how you have paid your debts in the past.  As discussed in my previous blog post it takes time to remove derogatory reporting from your credit report.  Doing so will reduce your score but it will take time.  A quicker way to raise your score is to pay down outstanding credit, particularly on revolving or charge accounts (Visa, Mastercard, Department store).  One of the factors in a credit score is the amount you owed in comparison to the amount you have available.  If you have a Discover card with a limit of $5000 and owe $4875 on it this is creating a depression on your score.  If you are able to pay the balance down to below 50% of the limit you will see an increase in your credit score. IMPORTANT! Do not start paying all your credit balances down to half the limits just to lower your score if you are getting ready to purchase a home!  You may be spending money and actually hurting your ability to qualify! 

The other way to raise your score is to reduce available credit, this can be accomplished by closing accounts you no longer use or need.  Most consumers need one perhaps two credit cards at most.  My preference is to have a primary card that is tied to a mileage or points program.  Use this much like and ATM card monthly to take advantage of the "perks" you may accumulate such as free airfare for the family vacation.  Pay off the card every month to ensure you are spending what you can afford on your budget.  You may wish to carry a second card with a higher limit that you use only for the "big ticket" items that you know will take some time to payoff.  This card may also be tied to points, but should have the lowest rate you can obtain.  Close every other account.  For one it will increase your score and secondly reduce the possibility of someone taking the number and using it.

Closing Accounts

To close an account do not just call the credit company and say, "I want to close my account." This may or may not result in them actually closing your account, but it will result in them knowing you wish to close your account.  They will check your score (they have your authorization from your credit agreement to do so) and if sufficiently high will instead of closing your account send you communication that you are pre-approved for a higher balance. 

To properly close your account send a letter to the creditor with your name, address and account number.  State that you are instructing them to close your account.  Your account is being closed with no balance owing and no derogatory information reporting on the account.  State that you are also revoking any rights or authorizations you have given to them to obtain any credit information from any credit bureau and also revoking their rights to provide your name, address or any information to other entities, including subsidiaries.

Copy the letter four times.  Keep one copy for yourself and send one copy to each of the credit bureaus (addresses in prior blog post here).  If you are canceling more than one account you can send all the letters at once.  Be sure to include a cover letter with your name, address and social security number and detail the creditor and accounts you are closing.

Do You Need To Worry About Your Score?

Yes for most and no for many.  According to Fair Isaac the median score in the country is 723; meaning just as many scores are above this number as there are scores below this number.  For mortgages we have certain benchmark scores, and in the past few months these have moved up about 20 points.  These are not written in stone but are benchmarks for loan types or rates for which applicants may be eligible.  Do not just read these numbers and assume you fall into a category--get "checked out" by a professional (preferably me!) for your overall qualifications and financial standing and possible mortgage options:

Below 620: Sub-prime, perhaps FHA or other government programs

621-680: Some "Alt-A" products or conforming type loans, there will probably be some add-ons to rate or fees

680-720: Very good credit and eligible for most programs if otherwise qualified

720-760: Eligible for virtually all programs is otherwise qualified, depending on program might get a break in fee.

760-850 (highest score): all programs if qualified and break in fees for most programs.

If your score is in the solid mid- to high- 700s or over 800 you do not need to worry about much.  Do not try to increase your score, try to minimize your exposure to fraud and theft.  Do not worry about the impact on your score of inquiries, an additional card or other credit items other than derogatory information.  You have exhibited the ability to manage your credit and finances and chances are slim that unless and extraordinary event occurs you will always maintain a high score.

If you pay your bills on time and limit the amount of bills you have to pay chances are you will have a good solid credit score and you should not obsess over what that score is.  If you have had some issues in the past or are spread over many different creditors or have other factors dampening your score there are steps you may take to improve your score and your credit/debt management.  If you have questions how please contact me.

FICO website (click on "About Fico Scores" tab for pie-chart)

Free booklet in Adobe from FICO here

Dennis

 11:46:51 AM