Vail Daily column: You can manage your credit score
These days, we all have a credit score, and how can you improve it if you have a low one, and did you know there may be a dozen versions of your credit score that might reflect 100 points of more difference?
Credit scores have also evolved into a consumer product, and there are many companies who will offer you a free look at your score. Unfortunately, most of these scores are what I like to call cotton candy scores,” which means they might look cool, taste sweet but don’t have much value when it comes to determining your credit worthiness. There are even more companies who will sell you a score, which is also often worthless.
Free Not Always Better
Companies that offer you a free look at your score are not doing it because they are a consumer charity. Most are research firms harvesting data to sell to other businesses for market research or target marketing of specific products. They generally have made up (or bought from someone who does make up such things) some form of program that will take your credit data and pop out a number that allegedly indicates your credit worthiness.
In addition, they have also just harvested all the information off of your credit report (with your permission to look at your credit report) and now have a list of, for example, homeowners who have mortgages or people with car loans that are close to being paid off. They then find firms that prospect for people who might be in the market for home refinances or about to buy a new car and sell them prospect lists.
In the meantime, the consumer gets a credit score that, for the most part, doesn’t mean a thing. Indeed, one companies evaluation that you have a comfortable 735 credit score might equate out to a not so good 625 with another scoring system.
Fair Isaac Company
As mortgage lenders need a non-biased scoring model, they rely on a company called Fair Isaac Company (known as FICO), who pioneered credit scoring. FICO has no ulterior motives and as such does not give away their work in the hopes of harvesting other types of information. Their methods are accepted as the gold standard of the industry and as such approved by Fannie Mae and Freddie Mac for use in determining eligibility for government agency backed mortgage loans. These days, your eligibility and the rate you pay are heavily dependent on your FICO score. Mortgage lenders will pull reports and FICO scores from all three major bureaus (Trans Union, Equifax and Experian) and use the mid score from the three to determine if you make the cut and how much you will pay for a mortgage loan.
For those who are credit score challenged, there is often much that can be done to improve a score prior to applying for a loan. The question is what to do, and in this area urban legends abound. Everyone’s dog sitter’s brother-in-law’s next door neighbor seems to have the perfect solution.
The fact is every credit profile is unique and the score is determined by a mix of factors. What may cause a 100 point improvement for one borrower (such as paying off every credit card) may make five points difference for the next guy. In some cases paying off certain types of accounts (or just paying them down to a certain point) will make a difference. In some cases paying off too many things can be negative to your score.
So what is a hopeful home buyer to do if he wants to get the best rate and chance for approval to do? The answer lies in using technology. Throughout the years, there have been some computer geeks out there who have dedicated their lives it seems to cracking the secrets of how credit scores are calculated and they have shared their findings via software programs that will model what will happen to your credit score if you do certain things. Some work better than others, but there are programs that work really well.
We have a credit report simulator that we have found very reliable, and it has proven a very valuable tool to use to help our clients create a plan to increase their credit scores (or to understand they might just have to wait things out for a year) well before applying for a loan. This is not credit repair (which entails haranguing the credit bureaus to remove legitimate negative information), rather it is deciding what balances to pay down and how far, and what accounts might be closed or would best remain open and should balances be consolidated onto one card. There is usually no way to remove legitimate dings to your credit history other than wait them out.
There is a science to doing what you can legitimately do and it is not an endeavor for the uninformed. For example, a card that has been recently opened and carries a balance will weigh heavier on lowering a score than a card that has been opened for many years carrying the same balance. In some cases, we might transfer the balance from the newer account to the older account and see a score increase, even though the client is carrying the same amount of debt. Paying off two cards with $500 balances down to zero might carry far more weight than paying off $1,000 on a card with a $5,000 remaining balance.
Once a plan is made and the client carries out the recommendation there are two options. The first is to simply wait 30 to 60 days for the payments or changes to post and the score to adjust naturally. If time is of the essence to, for example, facilitate a purchase, then we can assist the client by providing a rapid re-score capability where, with proper documentation, we can get the bureaus to update the accounts within three to four business days and re-score the report. Regardless, the client must lock away his credit cards and not charge anything short of the direst of emergency purchases or all the planning is for nothing.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.