The World of Credit: Raise the credit scoreJohn J. Hudockcredit score, FICO, tips, strategy
Using the correct strategy, it generally much better for your
client if you show him how to increase his credit score a few
points than for you to locate a sub-prime lender. When you have the
client increase his own credit score, you do him a great servicea
service he will not forget.
Lenders base their initial observations on the middle credit
score. The credit score is generated currently by a model developed
by FICO. They use the information that is being reported on the
credit report by creditors. This is where the problem starts. The
information on any credit report is, to some degree, inaccurate. I
have never seen a tri-merged credit report without an error. The
current scoring system, in my opinion, is designed to elevate the
risk and lower the credit score for almost every consumer. It is
not a coincidence that the errors are to the benefit of the
lender.
How do you address this? The only accurate method for beginning
to correct inaccuracies is to interface with the consumer and the
credit report. You must determine what tradelines are correct and
which have issues. Show the consumer what is being reported and how
it reflects on his credit score. You have to tell him where there
are problems and what he can do to correct them. By suggesting
basic methods to increase his credit score, you increase his
loan-to-value options and lower his interest rate and monthly
payments.
My goal is not to give anyone a perfect credit score; it is to
qualify them for a mortgage. You need to have your clients reach a
target score. The target score would be the level of credit
necessary to satisfy the lender. Sometimes it's only a few points
that could be realized utilizing proper credit techniques. With
appropriate recommendations from you, your client can increase his
credit score a few points before you submit it to a lender. You can
give him a few points to qualify for the loan, a few points to get
a lower debt ratio or a few points to get a preferred
loan-to-value, in order to get a better interest rate and a lower
monthly premium.
The fastest way to increase a credit score is to pay down the
balances on the revolving accounts. The reason that this is the
most effective way of increasing the credit score is that credit
cards are reported in real time. The credit report reflects the
most current reporting balances from the credit card bank. This
works both waysif your client uses his credit card and the balance
is high when a credit report is pulled, this will reflect a lower
credit score as compared to having a balance below the 25 percent
level. Select the accounts with the lowest high limits and have
your client pay those accounts first. If there is a credit card
with a $400 high limit and it has $400 balance, then 100 percent of
the credit limit is being used. This could cause a reduction of up
to 90 points on this credit card, depending on how many revolving
tradelines there are. Paying $300 on this particular card could
increase the score almost 70 points. Compound this by paying other
revolving accounts with high balances, and an individuals score
could be increased by 100 to 150 points.
Another option for increasing a credit score quickly involves a
credit score that is above 620 on any tradelines more than a year
old. You can then have your client request an increase in the high
credit limit (be careful about how many tradelines you recommend,
as this will add an inquiry to the credit report and may offset the
advantage of improving the credit ratio on that tradeline).
On the front of every credit report, each repository lists the
impact reasons associated with their credit score. In the past,
they have listed about 33 separate reasons. Many are similar. Codes
014, 016 and 024 involve the use of revolving credit:
"Code 014: Length of time accounts have been established is too
short
"Code 016: Lack of recent revolving account information
"Code 024: No recent revolving balances
There are three types of revolving credit: bank credit cards,
store credit cards and lines of credit. They have to be used at
least once every six months to avoid a negative impact. If a
consumer has a revolving account that was not being used, he can
realize 10 to 12 points in some situations by simply using the
account and paying down the balance to 25 percent or less of the
high limit.
"Code 001: Amount owed on accounts too high/Code 010Proportion
of balances to credit limit too high. Pay any account balance down
to 25 percent of the high limit.
"Code 003: Too few bank revolving accounts This code has a very
high impact on credit scores. You need three to five revolving
accounts to get a score above 650. Scores in the 400s generally
mean "no credit." What they really mean is "no revolving
tradelines."
"Code 004: Too many revolving accounts I suggest that you limit
the number of open accounts to eight revolving accounts. The most
favorable scenario would be to close the accounts not used and have
the creditor include a statement on your account that you requested
it be closed. Be certain that you have a record of the
request.
"Code 005: Too many accounts with balances Pay off any accounts
with low balances.
Remember, the positive actions that are taken do not count until
the creditors report the changes to the repositories. Look at the
closing date on the statement and realize that this is the date the
changes must be at the repository.
Every credit report is unique in the method to increase the
score rapidly. What I call emergency credit is a situation when it
is necessary to increase a credit score by a few points in a short
amount of time. This exact method will vary from credit report to
credit report, depending on the profile of the specific tradeline
mix and combinations. However, the basic methods are listed above
and I consider this credit education. You have a responsibility to
understand and educate your clients on good credit habits. You
should emphasize to your friends, relatives, neighbors and
acquaintances that sooner or later, they are going to need your
services. They should not wait until they've found a house or are
in the need of refinancing. You should pre-qualify them to find out
exactly what type of mortgage a lender will be able to offer them.
The more time you have to work on any problems guarantees better
solutions. You should constantly be looking for clients and not
waiting for them to come to you. They will come back when they
realize you are knowledgeable in your field and took the time to
pay attention to their needs.
John J. Hudock is president of The International Credit Club
and The World of Credit, two companies specializing in credit
report problems and scores. He also has online continuing education
courses on credit approved by the Pa. Department of Banking and the
Pa. Department of Continuing Legal Education. John can be reached
at (877) 829-5432 or e-mail
[email protected]. He invites e-mails on
any credit topic, will answer each one and publish any that will
benefit his readers. Please be specific with your
questions.
