- The percent of available credit and your on-time payment history are the two biggest determining factors in your credit score.
- A great payment record at a department store is good, but it's less influential than American Express, MasterCard or Visa.
- Make sure all your your clients are pre-approved for a loan before beginning the home search.
Did you know that the same credit bureau could report three wildly different numbers for your credit score on the same day? Now that you do know, what steps can you take to improve your personal score and help your clients navigate their FICO score to a final loan approval?
Have you checked out your credit scores on CreditKarma.com? Or perhaps you’re paying Equifax, Experian or Transunion for credit reporting, and you actually believe your credit score is the number they will report if you’re obtaining a loan. Think again.
A case study
During the real estate downturn, we ran our business on our personal credit lines, as do many startups, entrepreneurs and small businesses. For us, that meant we used a substantial percentage of our available credit. We have an impeccable payment record, long credit history, no derogatory remarks and only one credit inquiry.
We sold our house and will need 20 percent down, closing costs, plus six months of payments in the bank or cash equivalent and at least a score of 680 to qualify for our new purchase. You can imagine my shock when I went to CreditKarma.com and found that my credit scores were in the 620 range.
I contacted our loan officer, and she said that our low scores on CreditKarma.com made absolutely no sense. You only see those types of scores with people who have substantial numbers of missed payments, multiple derogatory marks and other issues.
After speaking with her, I decided to check some other sources. Here’s what I found, and it illustrates how bizarre the current credit reporting systems are. (All numbers were reported by Equifax):
- American Express reported Equifax score: 680
- CreditKarma: 618
- Fair Issac (lender-pulled FICO score): 668
- Equifax member: 720
That’s more than a 100-point variance from the same credit-reporting bureau!
By the way, when the lender pulled the FICO score — bingo — it was an instant 20-point drop, though it didn’t prevent us from getting pre-qualified.
And, even after we paid down a number of balances, the numbers still were very different. They ranged from 689 (a fair rating) to 748 (a very good rating). That’s equivalent to the difference between a C and a B-plus.
FICO under fire
According to the research firm CEB Tower Group, FICO scores are used in 90 percent of all credit decisions. This is despite the fact that 8.3 percent of adult consumers (19 million people) are unscorable.
Moreover, a recent Wall Street Journal article noted that Social Finance, a company that offers student loan refinancing, mortgages for high-priced homes and personal loans, has decided to do away with FICO scores.
The company doesn’t believe the FICO score itself is a real driver to credit performance. As of this date, its in-house scoring system is approving 10 percent more of applicants with no apparent loss in loan quality.
Steps to improving your credit score
If you or your clients are struggling with increasing your credit score, it might be useful to speak to someone who specializes in credit repair. Here are some additional suggestions that might also help:
1. Understand full credit reports versus what you see online
When we received a copy of our credit report from the lender, it was much more comprehensive than anything we found online. The history included all of our opened and closed accounts for housing, auto and revolving credit.
It also included a comprehensive payment history, including any late pays. This provides the lender with a complete picture and might also account for some of the differences in reporting.
2. Heed the two most important factors
The percentage of available credit and your on-time payment history are the two biggest determinants of your credit score. Revolving credit is indeed the 800-pound gorilla in this equation. Here’s how they will rank you based upon the percentage of revolving credit that you are using:
- Excellent: 0 to 9 percent
- Good: 10 to 29 percent
- Fair: 30 t0 49 percent
- Poor: 50 to 74 percent
- Very poor: 75 percent or more
To put this in context, if you have a $10,000 credit line and you’re using $5,001 of it, you have a “poor” ranking. And if you have a balance of $3,000, your ranking is only “fair.”
3. Make payments strategically
Most experts agree that paying off cards with the highest interest rate is the best course of action. But you might want to use an entirely different approach.
If you are working with a husband and wife, the best cards to pay off are those in which they have joint liability. That means both parties get a reduction in their credit utilization scores.
If one of the parties has good credit utilization and the other does not, focus on improving the credit utilization for the person with a poor ranking. One way to do this is to remove that individual from any cards that do not list him or her as the primary cardholder and then pay down the balances on the remaining cards.
4. Know that type of credit card matters
You might have a great payment record at your local Sears or Macy’s, but those credit sources are less influential than American Express, MasterCard and Visa.
If you are building new credit, payment histories on those cards have a stronger influence on your score than department store credit cards have.
5. Circumvent credit company tactics that keep your scores low
Especially during the recession, a common credit card company practice involved lowering your credit line as you paid down your balances. Although we have seen no evidence of this happening with our MasterCard and Visa accounts of late, American Express is still aggressively pursuing this approach.
The result is that even though you pay down your balance, your credit utilization percentage fails to improve. Consequently, it might be smarter to prioritize paying down those accounts that leave your higher credit line in place over those that don’t.
6. Close or leave an account open
Given how revolving credit seems to be determined, it might be smart to leave accounts with zero balances open. However, you can be dinged for having access to too much credit, even if you aren’t using it.
So here’s the bottom line. Make sure that everyone of your clients is pre-approved for a loan before taking them out to look at property. For those who have serious credit issues, have them work with a credit repair service.
Also, advise your buyers to hold back on any major purchases or other expenditures until after their new home closes.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Learn about her training programs at www.RealEstateCoach.com/