Credit scoring is (deservedly) a big topic. In the mortgage industry, your credit score reigns supreme. You know the commercial (one of the ones with the family and the dog and the children and all the smiling) and they say, “Your more than a score” or something like that, remember that one? Well . . . they’re lying. Ok. So, maybe they aren’t lying, but it’s not like a mortgage lender is going to give you a great rate on a big mortgage debt because you are a really nice person, right?? The truth of the matter is that YOU aren’t a score, but your credit certainly is.
In the past, the credit scoring models of each of the three credit bureaus were guarded as closely held secrets. Even for people like me in the mortgage industry, the score was described as a “black box” of the credit bureaus — customer data goes in, the computer “looks” at it (that’s anthropomorphic, I think), the computer looks at all of the data and returns a credit score between 400 and 850. Computers thinking? and looking? and deciding things about our lives? Hmmmm . . . .
In the last couple of years, credit companies have begun to disclose what factors affect your credit score. While this information is very helpful, it is impossible to say with certainty, “If you do this . . . your score will go up by this many points.” However, there are a handful of easy things you can do to improve your credit score. Here are a few suggestions to help you understand your credit score (these suggestions are in addition to the obvious of making your payments on-time, not letting accounts go in to collections, clearing tax liens, judgments, etc):
1. Don’t carry a balance on your credit accounts of more than half of the available credit. The credit score model hates maxed-out credit cards. A credit balance that is at or above the credit limit hurts your credit score; it hurts less once you owe less than 75% of the available credit, even less if you owe less than 50% of the available credit. Here’s an example: if your credit card has an available credit of $1,000, your goal should be to have a balance of $499 or less. If you aren’t able to pay down your credit accounts to below half, then call and see if the creditor is willing to raise your credit limit amount. Raising your credit limit may accomplish the same thing. For instance, if you owe $499 on a credit card with a high balance of $500, your score is going to be lower . . . if the creditor would raise your available high credit to $1,000, your score would improve. I have had clients with seemingly perfect credit (no late payments, no collections, etc), but because of the number of accounts with balances and because every account was somewhere between 50% to 90% maxed-out, their credit score suffered . . . in the 620’s (no so good).
2. Don’t close old accounts. In the past people would recommend closing old accounts. And in the mortgage world, underwriters would look at what a borrower might be able to borrow in credit on old accounts and even require that the borrower close those accounts (especially if income and debt numbers were tight on the loan). With credit scoring models and automated-underwriting even trumping some underwriters these days, the length of time is no longer a factor and the fact that accounts have been open (and have a long term, well-established credit history) is a big plus.
3. If you have little or even no credit, ask a relative, spouse, significant other, lover, or parent to add you as an authorized user to one of their accounts. This will add additional credit history to your credit report (and the act of adding an authorized user to an account is usually as easy as a phone call and generally does not require any type of approval or credit inquiry).
Speaking of credit inquiries . . . credit inquiries (or the number of times you have had your credit pulled) does have an affect on your credit score. BUT, it is almost never the top thing affecting someone’s credit rating. In the grand scheme, or let me re-phrase that, in the grand-matrix of credit scoring, the credit model has to assume that an excessive number of inquiries means one of two things: either, one, the person continues to apply and get turned down for credit (and has to have more and more and more people pull their credit) or, two, they are desperate for credit and are looking to open up multiple accounts (to borrower as much as they can). If you are shopping for a mortgage, you need to have someone pull your credit as early in the process as possible. Waiting until the last minute to have your credit pulled (for fear of losing 4 or 5 points) makes very little sense (for too many reasons to go into here). However, once you have had one mortgage broker pull your credit and you know your credit rating, it is usually not necessary to have anyone else pull your credit until you are ready to move forward (to lock-in your rate, complete an application, etc.) If the mortgage person you are talking with will not or does not give you your credit rating, it is probably because they are afraid you will use that information to shop for a mortgage. And usually those people are afraid for a good reason.
4. A few points may make a HUGE difference . . . or it may make NO difference at all. Credit scores generally range from 400 to 850. In the mortgage world, a 660 credit score is considered average, 700 is considered excellent and anything below 580 is somewhere between difficult and very-difficult to get financing. At a credit score in the lower tiers (580 to 660), every point counts. On mortgage financing, the products available and the interest rate you may be able to qualify for is driven (partly) off of your credit score — and almost all 1st mortgage products have guideline minimums such as 580, 600, 620, 640, 660 or 680. On 2nd mortgage financing products, the credit score can be even more important. However, in most situations, at the higher tier of the credit scores (720+), there is absolutely no difference between a 720 credit score and an 820 credit score. Both are considered great credit and both are able to get the best rate and best terms for financing.
And as far as your credit and your credit score . . . you can take my advice or leave it . . . but remember (in the wise-words of Morpheus) ” . . . I can only show you the door. You’re the one that has to walk through it.” (Sometimes I even make my own self laugh — where do I come up with this stuff??)