Here is what I know about credit scores and mortgage financing; (1) they are the primary determinant in the mortgage approval process and (2) they loom large in the chase for the best interest rate. I also know that mortgage consumers do not like the idea that a less than perfect credit score can mean a higher interest rate. Many believe that somehow, somewhere, there is a lender willing to give them that advertised perfect-credit-score-big-down-payment rate they saw on the Internet, even though they have less than perfect credit and maybe not so much of a down payment.
The credit reporting agencies (Trans Union, Equifax and Experian) use secret algorithm-driven equations to generate these objective and unbiased measures of whether or not people pay their bills on time. These credit scoring models are proprietary and are kept secret for fear that if lenders knew how they worked; they would be able to manipulate them to make loans approvable. I am not so sure about that, making loans approvable is different than making loans that will repay and pretty much every lender prefers the latter.
I do not have security clearance from any of the big three repositories to the secret recipe for having a good credit score. But I have eyeballed lots of credit reports and used the “what if” tools that are available to help borrowers legitimately improve their credit scores. By no means does this qualify me as an expert on credit scoring strategies and credit repair, but it does allow me to share some real life experience and real life credit score improvement based on common sense and just a little bit of wisdom.
Improve your credit score
You can start by paying your bills on time. As obvious as this may seem, a 30 day late payment on a deprioritized, I-thought-I-paid-it Sears or Macy’s credit card reads as a recent 30-day late payment in the credit scoring algorithm. Now a 30-day late payment on a store card may not be as bad as a 30-day late payment on a car loan, or dare I say a 30-day late payment on a mortgage, but a recent 30-day late payment can put a hurt on your credit score just because it is recent. Pay your bills on time, all of them.
Leave your old credit card accounts open even if you never use them and never will. Having old credit lines is good for your credit score, they demonstrate that you have been a responsible user of credit for a long time and the credit scoring algorithm likes that. I have seen credit scores plummet when people closed out all of their old inactive credit cards trying to “clean up” their credit report, leaving only the shiny new active accounts open. Having only new and recent credit accounts telegraphs limited experience managing debt, this makes the scoring model nervous and as a result, points are deducted.
If you max out your credit card balances, your credit scores will suffer. I once had a borrower client with clean credit, no late pays, no real negatives at all, and in my amateur opinion, their credit scores just seemed lower than they should have been. Turns out, they had a Bloomindale’s credit account with an approved credit line of only $300, and they had used $280 of that available credit. The scoring model read the account as 93 percent utilized and was blind to the dollar amount. The credit score suffered as a result. The borrower paid $150 to bring the balance down to $130, reducing the utilization to below 50 percent. We were able to get them rescored which resulted in a dramatic increase in the credit score used for mortgage approval and we got them a better interest rate.
Pay disputed bills now; fight later
And pay that disputed medical bill that your health insurance company was supposed to cover. Otherwise, it is destined to become a medical collection account or a dispute on your credit report and that will definitely hurt your credit score. If your health insurance company has not paid it by now, chances are they are not going to pay it any time soon, certainly not before you need your mortgage approved. Take care of it yourself. If it is a matter of principle, pay it, make sure it is reflected on your credit report, and wage war against the insurance company when you have time to do that. Chances are, it is probably not worth the time or the effort or the satisfaction.
Paying attention to what may or may not be happening with your credit profile will pay big dividends when managing your credit life. Ask for help from experienced well reputed mortgage people as early in the mortgage getting process as possible, because the thousands of dollars that you might save, you might save.
A loanDepot licensed loan officer can help with these and any other lending questions. Call (888) 983-3240 to speak with one today.
Published June 16, 2015
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