As a loan originator, you’re exposed to many different credit profiles. You’ve run the gamut, and you’ve seen the good, the bad and the ugly. But nothing can compare to denying a mortgage to someone on the basis of their credit risk. Not only is it frustrating to lose business, but having to break the bad news to a mortgage applicant can be crushing.
The more you know about credit, the better prepared you’ll be to confront sticky situations like this. Here’s some tips that could help your applicants get on the right track, and reinforce your credit knowledge as well.
Make sure your credit reports are accurate
One in five consumers have an error on at least one of their credit reports. It may be worth checking to see if something’s missing. Under the Fair Credit Reporting Act, you’re entitled to one free credit report per year from each of the three major bureaus. You can request yours at AnnualCreditReport.com
Follow the 30 percent rule
Always make sure your account balances are less than 30 percent of your credit limit. This is called your credit utilization ratio. If you’re above this threshold, you could be in trouble- even if you’re paying off your account balances in full every month. Although 30 percent is the age-old axiom, you want to keep your percentage far below this estimate—in fact, perfect credit consumers have an average credit utilization of only seven percent. Keep all of this in mind, as your credit utilization accounts for about 30 percent of your overall credit score.
Have a strategy to avoid late payments
Get yourself on the right track so that you’re paying on time, every time. Try syncing up your payment due dates with your paycheck schedule, and consider signing up for mobile alerts from your bank so that you’re never missing a payment. If you’ve missed a payment, try getting on the phone with the creditor. Oftentimes, they’ll forgive a late payment if you have a good payment history.
Establish a credit history
About 15 percent of your credit score is determined by the age of your credit history—in other words, how long you’ve been using credit. Be patient; the major bureaus tend to look for credit histories of five-plus years, and the longer you’ve managed your credit responsibly, the better. For instance, if you’ve had a credit history of only a year, your score may be in the 600s, while someone with a five-year history may have a much higher score.
Mix it up
Apply for different types of credit. Of course, you should only apply for tradelines you can handle, but diversifying can really benefit your score. The bureaus like to see a diverse buildup of responsible credit behavior, including activity with credit cards, car loans or mortgage loans. Once you've used plastic responsibly for a year or so, consider applying for a small installment loan from your credit union or bank.
Establish checking and savings accounts
Lenders see checking and savings accounts as signs of stability. Opening checking and savings account is also one of the few things you can do as a minor to start building a financial history. While you can't get a credit card in your own name until you're 18, many banks won’t have a problem letting you open an account.
Become an authorized user
Have a close friend of family member list you as an authorized user on their credit card account. When the primary cardholder makes on-time payments, your credit score will benefit. Because credit card companies don’t have a minimum age to become an authorized user, doing so is a great way to build credit at a young age. Although authorized user status can help build your score, it doesn’t carry the same weight as maintaining full ownership of a credit card account, so you shouldn’t expect a vast increase in your score, but it’s a start.
Apply for a secured credit card
If you can't get a regular credit card, apply for a secured version. These require you to deposit money with a lender, and your credit limit is usually equal to the deposit. You'll want to screen your card issuer carefully though, because many will charge exorbitant application/annual fees or punitively high interest rates. Ideally, the card you pick would convert to a regular, unsecured credit card after 12 to 18 months of on-time payments.
Closing a card might do more harm than good
If you have a credit card you’re not actively using, closing it won’t do you much good, and it could even lower your score. When you close an unused account, the amount of credit you have available goes down. This will raise your credit utilization ratio, i.e. the percentage of available credit you’re using. Since it’s best practice to keep your credit utilization down, closing a credit card won’t help.
Remember the date
Try to pay off as much as you can before your credit card’s closing date. Since your statement’s balance on that date is directly used in determining your FICO scores, you want to present yourself to the bureaus in a good light during that period. The trick is that this doesn’t require you to directly change up your spending behavior, it just means you’ll have to focus on your activity earlier in the billing cycle. It’s a “hack” that could earn you some serious points, and you’re using your card the same as always.
Boost your score
Using a new tool from Experian, you now can link additional data like phone and utility bills to your credit report. The service is free, and you’ll also receive a copy of your credit report. If you have a “thin” credit history with few accounts, adding this information could be the perfect way to really make an impact. Of the 1.3 million Americans that have used the tool thus far, more than 840,000 have seen their scores increase.
Secure your credit file
In the wake of the major Equifax data breach
, it’s important to know how much of our data can be vulnerable to fraud. To secure your data and protect from identity thieves, place a security freeze on your credit accounts if you aren’t actively searching for new lines of credit. Since it’s now required by law for the bureaus to offer account freezes for free, protecting your data is a no-brainer. Plus, placing a freeze is a great way to prevent impulsively applying for new credit cards you don’t need.
Beware of hard inquiries
If your credit was drawn because you’re shopping around for a new loan, your score could decrease because the bureaus assume you’re planning to take on more debt. This is called a “hard inquiry”. If you’re shopping around for a new mortgage, several lenders might pull your credit within a short timeframe. If this happens to you, FICO will recognize you’re shopping, and will only penalize you with one inquiry, so long as those credit pulls are within a 45-day window.
Dispute any errors on your report
If you believe there’s an error on your credit report, take the following steps:
►Determine if you should contact the furnisher of the report, i.e., the bank or the credit card company. Sometimes, you can go directly to the furnisher before contacting the bureau and ask them to fix the error at the source.
►If this doesn’t resolve the issue, send a letter to the bureau that produced your report (either Experian, TransUnion, or Equifax) and explain in writing why you think something is wrong.
►Wait for a reply. In most cases, this could take up to 45 days.
►Review the results. The Bureaus are required to send a free, updated copy of your credit report if the dispute resulted in any changes.
Say no to pre-approved offers
Getting a pre-approval letter in the mail for a credit card can be exciting, but if you’re worried about your credit, you might want to think twice about taking the bait. A pre-approval does not mean you’ve been approved, and the creditor will need to pull your credit to find out, which could damage your score. If you think you’re prone to falling for these offers, you might want to opt out. To do so, you can register through the Direct Marketing Association
to have your name removed from DMA-member lists for five years. You can also call (888) 5-OPT-OUT.
Pay off the highest balance first
Let’s say you have two credit cards … Card A has a limit of $1,800 and a balance of $300. Card B has a limit of $1,000 and a balance of $800. You should always pay down the card with the highest credit utilization ratio. In other words, the card with the lowest percentage of available credit, which would be Card B. Remember the 30 percent rule … for Card B, this would mean you want to keep your balance under $300.
Don’t strive for perfection
You don’t have to be perfect. Only one percent of the public has a perfect 850 score, and there’s no loan offer that’s exclusive to applicants who are perfect. In fact, lenders usually reserve the best interest rates to any borrowers who are over a 760. So don’t stress! Continue to practice responsible credit habits, and you’ll be rewarded.
Don’t give up
Although many of the tactics above can provide a quick bump to your score, it generally takes years to build up your credit. But like anything else, practice makes perfect. And if you focus on the little things, chances are you’ll be pleasantly surprised.
If you found these tips helpful, don’t hesitate to share them with a friend. Remember, the habits you build while learning credit responsibility can go a long way in many other walks of life, and they can set you up for success in the long run. If your goal is to be smart with your money, building your credit history is a great place to start.
Matthew Holmes is marketing specialist for Data Facts. He may be reached by phone at (800) 332-9479, ext. 4312 or e-mail [email protected].