My business increased 20 percent in 2006 even as new loan originations in my market fell by 25 percent. It is down 25 percent this year, and although I would be happier with a positive number, it’s not bad when you consider the troubles in the credit markets as a whole. How have I accomplished this? I take my clients through a process I call 7 Steps to a 720 Credit Score, which gives them the power to use the credit scoring system to their advantage. More importantly, it differentiates me from my competitors.
The process has helped my clients increase their scores by as many as 80 points in 30 days without the headache of any “credit improvement scam” or letter writing. Here’s how it can work for you:
The Importance of Good Credit
Mortgage brokers know how important credit scores are to getting good terms for our clients. According to Fair Isaac Corp. (www.myfico.com), half of Americans have a credit score below 720, and it costs them money in higher interest rates. What people don’t always understand, however, is that this spells better opportunity for you, particularly in the wake of the recent turmoil in the credit markets, which caused many mortgage lenders to tighten their underwriting standards and some to stop lending altogether. The key is your good credit. You can stand out above the rest and have better opportunities in front of you!
When clients come to me with a score below 720, I show them that they may be overpaying on their loan because of their credit score. I talk to them about getting their score from ALT-A to prime or from prime to over 720 and show them how to do so (it’s all in 7 Steps to a 720 Credit Score). To my clients, this positions me as a professional adviser who can help them learn how to save money on their mortgage now and on every loan they take out in the future.
Improving a Credit Score
The last thing I want is to become a “credit improvement company” for my clients, so I create a special relationship with my clients by teaching them to help themselves, starting with an understanding of what has a big impact on their credit scores and what doesn’t. I focus on the credit items that have the biggest impact on their scores (10-20 points per item). Anytime I see a credit score below 720, I ask the following questions of my clients, each of which has a high impact on credit scores:
What is the ratio between my clients’ credit line and the balance on their credit cards? If the balance on any credit card is more than 30 percent of the credit limit, their credit score will fall.
The options to bring up their score could be one of the following:
- Transfer balances from one card to another so that none exceed a 30 percent ratio. If necessary, obtain another credit card and transfer balances accordingly.
- Pay down the balance on a card to bring it under the 30 percent line.
- Ask their credit card companies to increase their limits so that the balance falls under 30 percent.
Do they have at least three revolving credit lines from issuers such as Visa, MasterCard, American Express or Discover? Three credit lines will show lenders that they have established credit; fewer than three will limit their ability to get a high credit score.
Do their credit card companies correctly report their credit limits? Believe it or not, credit card companies routinely under-report the limits on their customers’ credit cards or, even worse, don’t report them at all. Why? Because it keeps competitors away. When competing credit card companies see high limits, they see creditworthy borrowers whom they can solicit through the mail. Low limits mean the opposite, so many credit card companies don’t report the correct limits just to protect their customer base. But this can cause their customers’ utilization rates to appear to exceed 30 percent, so their credit scores fall and they look like poor risks.
Do they have at least one active or paid installment loan—a car loan or lease, a boat loan, even a loan for computer equipment? Lenders like people with a healthy mix of credit, and an installment loan can do good things for a credit score, especially after a major delinquency, foreclosure,or bankruptcy. I counsel my clients to step carefully here. A finance account—that is, a credit agreement allowing someone to take, say, an expensive television home today and make no payments until next year—is not the same thing as an installment loan on a car. Indeed, people with finance accounts make lenders nervous on grounds that they may be overextended, so I make sure to steer my clients away from finance accounts, as they will adversely affect their credit scores.
Are there any high-priority errors on their credit report? These can include duplicate reports from collection agencies less than two years old; incorrect Social Security numbers, names, or other personal information; or, worst of all, someone else’s Social Security number, name, or personal information listed on my clients’ credit report. Such errors may indicate that they have become victims of identity theft, which can cause their credit scores to plummet (and make them weep with frustration as they try to recover).
Does their credit report show any accounts sent to collection? If so, it’s crucially important that they not pay before getting a “letter of deletion” from the collection agency. As we know, lenders often require that an account in collection be paid as a condition of the loan. But any such account should be paid through escrow at closing, not beforehand, and I counsel my clients to negotiate for a “letter of deletion” not just a “letter of payment” from the collection agency. Why? Most of the time, when people pay off accounts sent to collection, the collection agency files only a letter of payment noting that the account has been paid. A letter of deletion, on the other hand, states that the collection report was an error in the first place, and federal law requires that credit bureaus remove the negative item from the credit report altogether, with a commensurate improvement in the borrower’s credit score. It can take some doing to persuade a collection agency to file a letter of deletion over a disputed credit account, but the payoff in terms of an individual’s credit score makes it well worth the effort.
Lastly, I help clients understand that once they establish good credit, they need to stay vigilant to protect it. This means setting up a disciplined, ongoing effort to live on a budget and monitor those factors that have a high impact on their credit ratings. This takes work, of course, but the payoff is twofold. In the future, when my clients need credit, they will merit the best interest rates and loan terms available on the market, and they will come back to me as the professional adviser who helped them learn how to succeed in this effort.
Understanding These Concepts
By helping them understand these concepts, I can turn mediocre buyers into great borrowers—and my clients love it. What I learn in discussing my 7 steps program is that even many financial professionals such as accountants do not understand that eight out of 10 of their own clients may have errors in their credit reports and do not grasp how much money their clients might save in interest costs if they fixed the errors or how easy it is to do so. In all of this, my goal is the same as it is with my own clients—to offer valuable education on how credit scores directly affect how much people pay for their mortgages. I also take care to educate everyone who will listen about the realities behind the many credit improvement services advertised by “fly-by-night” companies, who might just be individuals working out of their homes. The best of such services focus on finding reporting errors in the files of the three big credit reporting agencies, and since most errors are what I call low-priority errors, at best these services succeed in moving an individual’s credit score into a higher tier 25 percent of the time. The worst will charge high fees and deliver little if any value.
Real-world value, on the other hand, is at the heart of my program. Consumers often find the credit world a daunting place, but in fact, understanding a few simple principles can have a substantial impact on their pocketbooks—and how to turn those complexities into advantages. I have seen these simple 7 steps work for so many others; they can work for you as well.