Neuswanger: How to improve your real credit score
These days, we all have a credit score, and you can improve it if you have a low one. But did you know there may be a dozen versions of your credit score that could be 100 points or more different?
Credit scores have 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 call “cotton candy scores,” which means they might look cool, taste sweet but don’t have much value when it comes to applying for a real loan.
Companies that offer you a free look at your score are not doing it because they are a consumer charity. Once you have signed up for their services, companies such as Credit Karma start harvesting your data including following your social media accounts. They then market your data to companies that pay them for lists of people who might be looking for a new credit card or car loan. If you post on Facebook that you just totaled your car and luckily walked away, quite likely you might get a sudden influx of spam from lenders that make car loans.
In the meantime, the consumer gets a “credit score” that, for the most part, doesn’t mean a thing. Indeed one company’s evaluation that you have a comfortable 735 credit score might equate out to a not-so-good 625 with another scoring system.
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
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. Over 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).
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.
Once a plan is made and the client carries out the recommendation there are two options. The first is to simply wait 30-60 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, we can assist the client by providing a rapid rescore capability where, with proper documentation, we can get the bureaus to update the accounts within three to four business days and
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from local readers. His web site is http://www.mtnmortgageguy.com
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